Block Fullness, Security, and the Price of Bitcoin

Abstract

We argue that the ability to execute transactions quickly increases the likelihood of successfully laundering bitcoin. As a result, cybercriminals are less likely to attempt breaches or frauds when they anticipate that bitcoin blocks will be congested. Moreover, those accepting bitcoin during periods of block congestion can be more confident that the funds were not obtained through illicit means and, therefore, require a smaller discount. Consistent with this reasoning, we find that block fullness is negatively associated with breaches and frauds, and positively associated with the price of bitcoin. To address potential endogeneity concerns, we exploit the Segregated Witness (SegWit) software upgrade. Our findings suggest that the observed relationship between block fullness and the incidence of breaches or frauds is causal.

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