Paweł Bednarek

Bitcoin’s Achilles Heel: Transition from Block Rewards to Transaction Fees (Job Market Paper)

Abstract: This article 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 miners' income will eventually rely solely on transaction fees. The analysis suggests that unless there is a significant increase in on-chain activity, these fees will not be enough to maintain current security levels. The paper projects potential security challenges starting around 2028, when miners' seignorage produced by supply expansion may 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 be a solution to the limited adoption problem that Bitcoin is facing.

Draft available: here

Rise of Passive Investing: Effects on Price Level, Market Volatility, and Price Informativeness

Abstract: In this paper, 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 influence the shifts in the distribution of investors selecting different investment vehicles. 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, consistent with empirical findings. I estimate that about 10% of current market volatility can be attributed to the rise of passive investing. 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.

Draft available: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4551509 

Media mentions:

1. ETF.com - https://www.etf.com/sections/features/etf-bubble-ghost-story-pricing-inefficiency-not-research-finds 

2. ETFSTREAM.com - https://www.etfstream.com/articles/etf-bubble-is-a-ghost-story-pricing-inefficiency-is-not-research-finds 

Materials I prepared: Click here.  

Graduate Microeconomic Theory (Fall 2021, Fall 2022, Fall 2023) with Professor Steven Matthews - University of Pennsylvania

Game Theory (Spring 2020, Fall 2020, Spring 2021, Spring 2022, Spring 2023) with Professor Steven Matthews - University of Pennsylvania

Introduction to Microeconomics (Fall 2019) with Professor Anne Duchene - University of Pennsylvania