Virtual Currencies: Media of Exchange or Speculative Asset?
33 Pages Posted: 6 Jul 2016
Date Written: June 29, 2016
This paper uses a theoretical model to analyse the dynamic relationship of virtual currency with fiat currency. The model demonstrates that the price impact of potential users and speculators in virtual currencies adversely affects their property as a medium of exchange and renders a crowding out of existing fiat currencies such as the US dollar unlikely. An empirical analysis of prices and user accounts (wallets) of Bitcoin supports the theoretical result and finds that Bitcoin is mainly used as a speculative investment rather than a medium of exchange. The analysis also shows that Bitcoin returns are uncorrelated with traditional asset classes such as stocks, bonds and commodities both in normal times and in periods of financial turmoil. Finally, we argue that the design and the size of virtual currencies such as Bitcoin do not pose an immediate risk for monetary, financial or economic stability.
Keywords: Bitcoin; Virtual Currency; Digital Currency; Alternative Currency; Medium of Exchange; Asset Class; Safe Haven
JEL Classification: E49
Suggested Citation: Suggested Citation