This paper develops a model of user adoption and use of virtual currency (such as Bitcoin), and focusing on the dynamics of adoption in the presence of frictions arising from exchange rate uncertainty. The theoretical model can be used to analyze how market fundamentals determine the exchange rate of fiat currency to Bitcoin. Empirical evidence from Bitcoin prices and utilization provides mixed evidence about the ability of the model to explain prices. Further analysis of the history of all individual transactions on Bitcoin’s public ledger establishes patterns of adoption and utilization across user types, transaction type, and geography. We show that as of mid-2015, active usage was not growing quickly, and that investors and infrequent users held the majority of Bitcoins. We document the extent to which the attributes of the anonymous users of Bitcoin can be inferred through their behavior, and we find that users who engage in illegal activity are more likely to try to protect their financial privacy.
