The digital revolution

The digital revolution has transformed daily life in the last thirty years or more. By itself, that doesn’t necessarily make it interesting, but the transformation often involves quite different ways of doing things done in the past. It is interesting to think about why those changes have occurred and what is likely to happen. The effects on financial markets and banking are widespread.

Private Digital Currency

Bitcoin has been much in the news. It really is the latest incarnation of electronic currency, which has been the next big thing for quite a few years. That said, Bitcoin does reflect serious technological advances.

My paper on “The Economics of Bitcoin and Similar Private Digital Currencies” summarizes the economic aspects of private digital money, using Bitcoin to make the discussion more concrete. The published version is in the Journal of Financial Stability.

I conclude that Bitcoin is likely to have a future. I am dubious that bitcoins will replace dollar bills when paying for a cup of coffee. I do think private digital money will affect foreign exchange transactions. Governments such as Venezuela or Zimbabwe which want to finance a fair amount of their spending by inflation. Private digital money may even become a store of value in some economies with high inflation.

This paper is a bit technical but the most technical bits concern cryptography, not economics. The underlying economics is not all that complicated.

Bits and Pieces: The Digital World of Bitcoin Currency” with Norbert Michel doesn't go into the cryptographic aspects and spends more time discussing regulation.

The blockchain is the underlying innovation that makes Bitcoin different than prior electronic monies and makes quasi-anonymous transfers possible. The Financial Management Association invited me to give a tutorial at their meeting in October 2016 and I gave it on blockchains.

You can see the talk in this video. You can look at the slides if you like.

Blockchains are getting a lot of attention in many applications that have nothing to with Bitcoin, which made this topic timely. I summarized the talk in a short paper “Blockchain: A Primer”. This paper is just that, a short primer. It appeared in The Most Important Concepts in Finance

Electronic Commerce and Electronic Money

Electronic money and even private electronic money is of course more general than Bitcoin or similar currencies. Bitcoin or other electronic monies are likely to play a big role in electronic commerce. While credit cards work today, there are only a few organizations finalizing payments and the charges are not trivial. Also, credit cards are not available to everyone or useful for all purposes.

While it is hard to be as sure about the importance of anything other than credit cards or substitutes such as Paypal, electronic money is likely be an important part of the development of electronic commerce.

This electronic money may well be private money, not government money. Debit cards seem to have become the version of electronic money adopted so far. While not as radical as many versions of electronic money, debit cards have made a lot of inroads into cash transactions.

Banks issued private currency from 1838 to 1863 — in what was called free banking — in the United States. This episode is informative about what can make electronic money successful and how electronic money might work. I have been doing research on this episode for some time. A summary of this episode and a brief discussion of the connection to electronic money is included in “Wildcat Banking, Banking Panics and Free Banking in the United States” published in the Federal Reserve Bank of Atlanta Economic Review 81 (December 1996), 1-20.

The following are short non-technical pieces on electronic commerce and electronic money.

Personalized Pricing on the Net
analyzes’s attempt to charge different prices to different customers without warning in September 2000. This did not go over well (to put it mildly) and it should have been obvious to them why it would not.

Is There a Future for Electronic Currency on the World Wide Web?
published in E*Journal, the journal of The Society for Electronic Commerce and Rights Management, Winter 1999.

Is E-commerce a Revolution?
published in E*Journal, Fall 1999. 

Is There a Future for Electronic Cash in the United States?
published in The Journal of Internet Banking and Commerce, November, 1998. A copy also is available here.

Returns to Stockholders in New Industries

Even before the demise of the so-called dot-com bubble in stock prices, Cora Barnhart and I started working on a paper to answer the question: “Are Stocks in New Industries Like Lottery Tickets?” The short answer is “No.”

Returns to Investors in Stock in New Industries” is a rewritten version of that paper with additional historical data. We find that investors received positive returns, sometimes spectacular ones. All that said, on average an investor generally would be better off with a diversified portfolio of stocks in the overall market given the risk. Furthermore, a portfolio of stocks in a new market does not compensate for the riskiness of the portfolio. So much for sector funds, at least in new industries. (And I do not doubt for other industries.)