The Bitcoin market scheme carries attributes of a payment system in that it facilitates the transfer of value between parties. Unlike traditional payment systems, which typically involve the transfer of value denominated in a sovereign currency such as the US dollar, Bitcoin has its own metric for value called a bitcoin.10 In essence, a bitcoin is an electronic token without reference to any underlying commodity or sovereign currency, and is not a liability on any balance sheet. Owning bitcoins amounts to nothing more than having the ability to move these bitcoins in the Bitcoin market. As such, a bitcoin has no intrinsic value. Rather, a bitcoin’s value is derived mainly from its use for making payments in the Bitcoin system, and from the purpose of accruing gains from bitcoins’ possible appreciation.
Users can transfer bitcoin over the network to do just about anything that can be done with conventional currencies, such as buy and sell goods, send money to people or organizations, or extend credit. Bitcoin technology includes features that are based on encryption and digital signatures to ensure the security of the bitcoin network. Bitcoins can be purchased, sold and exchanged for other currencies at specialized currency ex‐ changes. Bitcoin in a sense is the perfect form of money for the Internet because it is fast, secure, and borderless.
Bitcoin market is similarly highly liquid, we would expect there to be very little spread between its different exchange rates. To examine this hypothesis, we calculate the daily exchange rates in other currencies as a weighted average of the trades that occurred in that currency on a given day. We then take this exchange rate and convert it back to a USD exchange rate with the daily market rate.