The impact of the expansion of cryptocurrencies (Bitcoin) on the amount of money demand and seigniorage via DSGE Model

The mechanism of money creation and other inflationary measures of central banks, which often prefer the short-term interests of governments to the rationality and long-term stability required by the market, are among the most important reasons for the new monetary system architecture and the widespread acceptance of cryptocurrencies such as Bitcoin in the last decade. In this paper, we solve a DSGE model to investigate the impact of Bitcoin encryption on the money demand and seigniorage. To do so, the data of seasonal time series 1989 to 2018 have been used. In the model designed in this study, it is assumed that due to the use of money cryptocurrencies, the government revenue from money printing decreases; This will lead the government to reconsider the price of the energy (especially the energy used to extract cryptocurrencies) and supply it at the price that maximizes its profits. In this study, the shock caused by the price and the volume of Bitcoin transactions is considered as an indicator for the demand of cryptocurrencies. Our main finding is that as the demand for cryptocurrencies increases, the demand for the formal money decreases, the inflation decreases, and consequently the seigniorage revenue decreases. The results also indicate that the shock to the cryptocurrency from the channel of changes in the energy prices will compensate part of the government revenues, although in the long run the welfare effects of this policy have been significant.