Virtual Currencies: Media of Exchange or Speculative Asset?

33 Pages Posted: 6 Jul 2016

See all articles by Dirk G. Baur

Dirk G. Baur

University of Western Australia - Business School; Financial Research Network (FIRN)

Kihoon Hong

University of Technology Sydney (UTS)

Adrian D. Lee

Deakin University - Department of Finance (Property and Real Estate); Financial Research Network (FIRN)

Date Written: June 29, 2016

Abstract

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

Baur, Dirk G. and Hong, Kihoon and Lee, Adrian D., Virtual Currencies: Media of Exchange or Speculative Asset? (June 29, 2016). SWIFT Institute Working Paper No. 2014-007. Available at SSRN: https://ssrn.com/abstract=2803941

Dirk G. Baur (Contact Author)

University of Western Australia - Business School ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kihoon Hong

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Adrian D. Lee

Deakin University - Department of Finance (Property and Real Estate) ( email )

70 Elgar Road
Melbourne, VIC 3125
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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