Economics EE - Bitcoin

[DragonBorn]

Hello all,

New to the forum, but kind of need some help narrowing down the topic of Bitcoin as a research question!

So here's what I have gathered/thought about so far:

Bitcoin is an interesting virtual-currency that somehow stood out from all of the other virtual currencies such as in game coins in video games

It's similar to a currency, but can not be considered one due to the lack of government support

It's risks are high as cryptography may not be advanced enough to be hacker-proof

It's emerging steadily as more investors look into this form of currency/commodity

It's core is basically in place, now still needs more advancing

Traditional economists dislike the idea of this virtual currency

It is becoming more accepted

Things I am considering to explore:

The demand for Bitcoins in the market, the cause of the emergence of the Bitcoin

The potential risks involved in Bitcoin and what kind of damage it can do

The influence of Bitcoins in the future global economy

These are basically what I came up with, so help away please!

P.S. I am not too strong where I am taking this EE. I know it is a research paper, but I also understand that I am suppose to have my own opinion in it.. Not really 100% sure about the ultimate goal of this essay yet, so if you can answer that it would be great as well!

Thanks!

[Thrashmaster]

1. I don't know how far you are into this topic, but I know my school highly discouraged anything that is very recent. On the other hand, yours is an economics EE, so perhaps that's not the case (we don't have IB econ at our school).

2. Very interesting topic! I love learning about bitcoins. I'd be interested in seeing you discuss the differences between it and traditional currencies. I'd like to see analysts projections for some currency, bitcoins, and a commodity like gold and how they compare.

[DragonBorn]

1. I don't know how far you are into this topic, but I know my school highly discouraged anything that is very recent. On the other hand, yours is an economics EE, so perhaps that's not the case (we don't have IB econ at our school).

2. Very interesting topic! I love learning about bitcoins. I'd be interested in seeing you discuss the differences between it and traditional currencies. I'd like to see analysts projections for some currency, bitcoins, and a commodity like gold and how they compare.

Just starting the topic, so just trying to categorize thoughts together and form a single research question. And ya, I chose this topic because of the potential that lies in the Bitcoin and it's influence on the future economy.

P.S. Any ideas on what I can focus research topic on? I know sort of the general direction, but how do I mold it into a research question?

[Thrashmaster]

1. I don't know how far you are into this topic, but I know my school highly discouraged anything that is very recent. On the other hand, yours is an economics EE, so perhaps that's not the case (we don't have IB econ at our school).

2. Very interesting topic! I love learning about bitcoins. I'd be interested in seeing you discuss the differences between it and traditional currencies. I'd like to see analysts projections for some currency, bitcoins, and a commodity like gold and how they compare.

Just starting the topic, so just trying to categorize thoughts together and form a single research question. And ya, I chose this topic because of the potential that lies in the Bitcoin and it's influence on the future economy.

P.S. Any ideas on what I can focus research topic on? I know sort of the general direction, but how do I mold it into a research question?

Hmm... what to focus your topic on... I think that, first of all, this is completely up to you. But I think perhaps the first question is what command term you want to use. To What Extent and In What Ways and How are all really good command terms for what you're doing. The first thing that comes to my mind is "In what ways and to what extent will bitcoins become a..."

[dniviE]

Great to see that someone is interested in virtual currencies in here! If I had known about bitcoin in my first year of IB, I would have definitely attempted to write an EE on it in Economics or maybe even in Computer Science.

I am very unsure what a possible topic could be. The demand for bitcoin in a certain market and what influences that demand seems a bit too...basic. Or, maybe it is in fact a good question as there might be many factors influencing it (ie. speculation, adoption, media attention, etc.).

What I suggest you to do is to take a look at Google Scholar and take a look at what current research on Bitcoin is focused upon.

[DragonBorn]

Great to see that someone is interested in virtual currencies in here! If I had known about bitcoin in my first year of IB, I would have definitely attempted to write an EE on it in Economics or maybe even in Computer Science.

I am very unsure what a possible topic could be. The demand for bitcoin in a certain market and what influences that demand seems a bit too...basic. Or, maybe it is in fact a good question as there might be many factors influencing it (ie. speculation, adoption, media attention, etc.).

What I suggest you to do is to take a look at Google Scholar and take a look at what current research on Bitcoin is focused upon.

It is just that because of virtual currency being so novice currently, there is a relatively small amount of resources that I am able to use to proof my point, and I don't want the whole essay to be a complete speculation. But I will look into google scholar for some topics

[dniviE]

Well, for one you could cite Satoshi Nakamoto's paper outlining the features of the Bitcoin-protocl (https://bitcoin.org/bitcoin.pdf). Bitcoin have many novel and interesting features, for example the utilisation of a decentralised system of representing ownership or the inherent deflationary nature (ie. there is a limited amount of bitcoin that will ever be obtained). Analysation of deflation could be interesting, but it is unclear if it fits in the IB requirements. It might be too conceptual and suffer from a lack data collection.

As far as I remember, the students that I know of in my previous school that did EEs in Economics all had to do some sort of primary data collection, so you would have to do that too. That might prove difficult with bitcoin-related data unless you are for example attempting to correlate media-attention (via Google Trends/News) with the price spikes of bitcoin.

If you have not discussed the topic with your EE advisor yet, you should do so. Find out exactly what the criteria are, and what you need to do for primary/secondary data-collection and the like!

[xaviergoby]

  I am also currently doing my Extended Essay on Bitcoin and my research question is "“How will an increase in  the supply of Bitcoins affect the monetary policy of the US Federal Reserve?â€

Could I please get some opinions please ?

 

  My primary data is consisted of surveys which I got people living in the United Stated and I am also questioning leading economists working for the Federal Reserve.

I would like to get in touch with you DragonBorn for it is quit lonely out there for someone doing their EE on Bitcoin We could work together and share opinion and review each others work if you would like!

[OnceAgain]

So far replies have been generally positive. However, In my opinion, doing an Econ EE on Bitcoin is not something I would recommend. It will be incredibly difficult to apply an adequate amount of IB Econ content to your essay. For example, what parts of the economics syllabus will you use in your essay? Just supply and demand is going to be too simple, and doing something like exchange rates is incredibly complex. I think that digital-currencies like Bitcoin are more apt for a CompSci EE than an Econ one.

 

That being said, if you are seriously considering doing your EE on Bitcoin you should think hard about what underlying economics principles you are going to discuss. I have been involved with Bitcoin for over a year, including trading on exchanges, and I can tell you that pulling data for the demand for bitcoins in the markets is incredibly challenging by itself. Maybe you want to look at bitcoin under a free-floating exchange and compare it to a managed floating exchange regime, like that of the Singapore dollar.

 

In terms of the above question, it is clear that Bitcoin is hardly of any concern to the US Federal Reserve. The FED, like any central bank, targets inflation rates and tries to increase macro output, while keeping unemployment low. Bitcoin is irrelevant to all these goals. The US Fed won't change its policies because of Bitcoin until it is a large enough part of the economy to even be considered by the FED. It's probably best to rephrase that question into something more solid.

 

That's just my 2 cents, but always check with your supervisor before making any big decisions concerning your EE. Good luck!

[xaviergoby]

Some of what you have said is wrong I believe 

http://fas.org/sgp/crs/misc/R43339.pdf

The following is a link to a pdf which is what the Fed had to say about Bitcoin

[OnceAgain]

In the PDF you linked me it is clearly outlined what I said before: "At Bitcoin’s current scale of use, it is likely too small to significantly affect the Fed’s ability to conduct monetary policy and achieve those three goals."

 

It goes on to say that, yes, "if the scale of use were to grow substantially larger, there could be reason for some concern" which could result, conceptually, in Bitcoin:

 

1) substantially affecting the quantity of money

or (2) influencing the velocity (rate of circulation) of money through the economy by reducing the demand for dollars

 

However this is all very hypothetical and I wouldn't recommend someone to do an EE where they can only get limited secondary research as it tends to turn into a narrative rather than an economic investigation.

 

These are just my views and you do not have to take my advice of course.

[xaviergoby]

Well then I am quit simply utterly screwed... I have to hand in my draft within 4 days and I have done 3200 words on this research question...how would you recommend I proceed? Do you have another research question which would be better suited?

[Tom]

That's funny, I was considering writing my EE on the topic of bitcoins too.

[OnceAgain]

xaviergorby, you are not screwed. There are still ways you can write a pretty good essay even if you're question isn't ideal. What you should do first of all is, if you have survey and interviews for primary data, make sure to always refer back to that in your analysis. Avoid writing a narrative. Don't simply state what the FED is saying but use your own diagrams (even simple supply and demand stuff helps) to explain the situation. Evaluate potential risks for the economy using IB macroeconomic concepts. For example, how would an increase in the money supply (given Bitcoin increases the velocity of circulation of the USD) affect interest rates in the US? What policies could the FED use to counteract the risks? Expanding on this, based on secondary information and your primary data, will give your EE more of an 'investigative feel'.

 

In your conclusion you can explain the relevance of the topic for the future of the economy - in fact, with increased modernization in the world and the rise of technology it is very likely that we will be transacting with digital currencies in the future. Maybe it is 15 years from now, and maybe it's not Bitcoin, but it could be something like Bitcoin. As long as you link it to why this topic is relevant to your studies in IB economics you should be fine. 

 

Have your economics teacher read the draft and ask them for feedback. If you approach your topic correctly you can still do well.

[xaviergoby]

Thank you very much OnceAgain for the reassurance! A survey I have done is ask people if they knew about bitcoin, whether they would be interested in investing in Bit coin and whether they were interested in a number of it's aspects. This will be part of my primary research, what is your opinion?

 

Could you please share some ideas with me in regards to the actions the Fed may take in order to contract the risk?

[OnceAgain]

In terms of your survey, I think that those kinds of questions are great for background and for an introduction to your analysis. Further primary research you should do is get some bitcoin data and manipulate it on your own, which technically counts as primary research (as far as I know). I would recommend referring to data like the weekly number of transactions in Bitcoin (which tracks adoption), and the supply of Bitcoins, etc... Quandl has a load of data on Bitcoin, which you can download and manipulate, here . I read in your previous post that you were also questioning economists working for the Fed. That kind of primary research is golden. If you have a credible interview or questionnaire of some sort to refer to in your analysis you will be able to make much more sound arguments.

 

For your second question, in order to mitigate the risk of an increase in the money supply (given Bitcoin adoption grows to an extent that it sufficiently increases the velocity of circulation of the USD) the Fed would have to use contractionary measures. Three ways they can keep the money supply in check is by raising reserve requirements, raising the discount rate or by selling bonds in the open market (done by the FOMC). Refer to the MV = PQ relationship, here . Right now the Fed can only ensure that the trust and belief in the US Dollar remains strong so that the size of the Fed’s balance sheet remains. These are the things I can think of right now, off the top of my head. I am sure you could find more things the Fed could/is doing to reduce the risk an increase in the use of Bitcoin would have on economic stability and growth through secondary research.

[xaviergoby]

Thank you very much! This is great stuff and you have been very helpful .I shall get cracking right away.

[xaviergoby]

However I do not think that MV = PQ will be useful? Am I wrong? If so can you help me out by explaining how I could incorporate this into my essay?

[OnceAgain]

MV = PQ is probably not necessary, all it really explains is how there is a direct relationship between an economy's money supply and the corresponding price level in that economy. If you still need something to talk about in the essay you could bring in MV = PQ by talking about how an increase in the money supply can lead to inflation. I found a website, here, that explains all this better than I can. But, yeah, it's not necessary to talk about it if you don't think it's directly relevant to what you are saying in your essay.

[OpTiC_TRONIIX]

@xaviergoby Hi. I'm currently doing my EE in economics and focusing on bitcoin. I was just wondering how you did on yours and if it is possible to use yours as an exemplar. It would really be helpful and I would really appreciate it. Thanks.

Cheers.