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Financial Paradigm Shifts : = Bitcoin's Future and Implications of Passive Investing.

Record Type:	Language materials, manuscript : Monograph/item
Title/Author:	Financial Paradigm Shifts :/
Reminder of title:	Bitcoin's Future and Implications of Passive Investing.
Author:	Bednarek, Pawel.
Description:	1 online resource (117 pages)
Notes:	Source: Dissertations Abstracts International, Volume: 86-02, Section: A.
Contained By:	Dissertations Abstracts International86-02A.
Subject:	Finance. -
Online resource:	click for full text (PQDT)
ISBN:	9798384025320

Financial Paradigm Shifts : = Bitcoin's Future and Implications of Passive Investing.
Bednarek, Pawel.

Financial Paradigm Shifts :Bitcoin's Future and Implications of Passive Investing. - 1 online resource (117 pages)

Source: Dissertations Abstracts International, Volume: 86-02, Section: A.

Thesis (Ph.D.)--University of Pennsylvania, 2024.

Includes bibliographical references

This dissertation consists of two distinct chapters, each exploring recent transformative shifts in economics and finance, with an emphasis on their long-term consequences.In the first chapter, I answer growing concerns pertaining to the rapid growth of passive investment strategies over the last two decades. I construct a rational expectations equilibrium model allowing investors to choose different modes of investment (active, passive, and delegated active), introduce agent heterogeneity, and estimate the model using data from 2000 to 2017. The model considers investment fees as exogenous, and variations in these fees are the main driver for changes in investor proportions. I find that the growth of passive investing did not increase the overall price level, thus contradicting the common ETF bubble hypothesis, which postulated that rapid growth in passive strategies may lead to the detachment of prices of these securities from fundamentals. Furthermore, the model suggests that this shift in investing has contributed to increasing asset price volatility, which is consistent with empirical findings. I estimate that about a tenth of current market volatility can be attributed to the rise of passive investing over the last two decades. It also resulted in diminished price informativeness due to weakened information acquisition. Further reduction in passive management fees will strengthen these effects. Reductions in fees associated with delegated active investing may have an ambiguous effect on the proportion of passive investing but will result in enhanced price volatility and reduced informativeness, akin to the dynamics observed in passive fee reductions.The second chapter examines the impact of the Bitcoin network's transition from mining subsidies to transaction fees on its long-term security and sustainability. The scheduled reductions in block rewards, known as halvings, lead to a decrease in Bitcoin's supply expansion rate. This shift means that the income of miners will eventually rely solely on transaction fees. I construct an overlapping generations model with a type of the Lagos-Wright structure, where users use Bitcoin to purchase a good that can only be acquired using this cryptocurrency. They compete for the inclusion of their transactions on the blockchain. I introduce the concept of real hash rate to analyze the network's security. The analysis suggests that unless there is a significant and permanent increase in on-chain activity, transaction fees will be insufficient to maintain current security levels. The paper projects potential security challenges starting around 2032 when miners' revenue produced by supply expansion does not support a non-zero Bitcoin price equilibrium. A simple inflationary policy, setting a fixed emission rate at about 1%, would provide greater sustainability and could alleviate the consequences of the limited adoption problem that Bitcoin is facing.

Electronic reproduction.
Ann Arbor, Mich. :
ProQuest,
2024

Mode of access: World Wide Web

ISBN: 9798384025320Subjects--Topical Terms:

559073
Finance.
Subjects--Index Terms:

BitcoinIndex Terms--Genre/Form:

554714
Electronic books.

Financial Paradigm Shifts : = Bitcoin's Future and Implications of Passive Investing.
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504 $a Includes bibliographical references
520 $a This dissertation consists of two distinct chapters, each exploring recent transformative shifts in economics and finance, with an emphasis on their long-term consequences.In the first chapter, I answer growing concerns pertaining to the rapid growth of passive investment strategies over the last two decades. I construct a rational expectations equilibrium model allowing investors to choose different modes of investment (active, passive, and delegated active), introduce agent heterogeneity, and estimate the model using data from 2000 to 2017. The model considers investment fees as exogenous, and variations in these fees are the main driver for changes in investor proportions. I find that the growth of passive investing did not increase the overall price level, thus contradicting the common ETF bubble hypothesis, which postulated that rapid growth in passive strategies may lead to the detachment of prices of these securities from fundamentals. Furthermore, the model suggests that this shift in investing has contributed to increasing asset price volatility, which is consistent with empirical findings. I estimate that about a tenth of current market volatility can be attributed to the rise of passive investing over the last two decades. It also resulted in diminished price informativeness due to weakened information acquisition. Further reduction in passive management fees will strengthen these effects. Reductions in fees associated with delegated active investing may have an ambiguous effect on the proportion of passive investing but will result in enhanced price volatility and reduced informativeness, akin to the dynamics observed in passive fee reductions.The second chapter examines the impact of the Bitcoin network's transition from mining subsidies to transaction fees on its long-term security and sustainability. The scheduled reductions in block rewards, known as halvings, lead to a decrease in Bitcoin's supply expansion rate. This shift means that the income of miners will eventually rely solely on transaction fees. I construct an overlapping generations model with a type of the Lagos-Wright structure, where users use Bitcoin to purchase a good that can only be acquired using this cryptocurrency. They compete for the inclusion of their transactions on the blockchain. I introduce the concept of real hash rate to analyze the network's security. The analysis suggests that unless there is a significant and permanent increase in on-chain activity, transaction fees will be insufficient to maintain current security levels. The paper projects potential security challenges starting around 2032 when miners' revenue produced by supply expansion does not support a non-zero Bitcoin price equilibrium. A simple inflationary policy, setting a fixed emission rate at about 1%, would provide greater sustainability and could alleviate the consequences of the limited adoption problem that Bitcoin is facing.
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650 4 $a Public policy. $3 1002398
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653 $a Cryptocurrency
653 $a Mining
653 $a Passive investment
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