Cryptocurrency as an Adverse Shock to a Macroeconomy : An ABM Perspective

Abstract

Cryptocurrencies or digital private monies, have rocked the traditional central bank’s monopoly on money printing.Thought they have been eulogized as future of finance, the next big thing, and democratization of banking, sometime seven as a panacea for all of the societal problems, adoption by the masses has been sheepish in the last decade. In this study, we examine the impact of cryptocurrency design on its profitability and present a mathematical argument about its nature. We also develop a theoretical framework for an agent-based macroeconomic model that incorporates cryptocurrency. The key features of the model include: (a) bufferstock style consumption, (b) adaptive heuristic decision making, (c) sticky wages, (d) two classes of firms, (e) realistic inventory and loan applications (f) lifelike cryptocurrency growth function, (g) state-dependent trading strategies, and (h) a banking sector limited by Taylor-like monetary rule. Our findings suggest that cryptocurrency has a ponzi-like structure due to its design, which leads to ongoing volatility and the need for liquidity. While this characteristic may decrease over time, it does not disappear completely. The only way to ensure sustained value is to have a clear and specific use case. Our agent-based macroeconomic model of cryptocurrency captures important characteristics of cryptocurrency and household financial behavior, which can be used in further research to understand the effects of cryptocurrency speculation on macroeconomic stability.