Excess Volatility as an Impediment for a Digital Currency

40 Pages Posted: 11 Apr 2017 Last revised: 4 May 2018

Dirk G. Baur

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

Thomas Dimpfl

University of Tuebingen - Department of Statistics and Econometrics

Date Written: March 1, 2018

Abstract

Bitcoin is a digital currency and designed to have typical functions of a currency such as being a medium of exchange, a unit of account and a store of value. Each of these functions is adversely affected by the volatility of the currency. If a currency exhibits extreme fluctuations, its usage as a currency is limited, in particular if the currency is not backed by any government as is the case for Bitcoin. By means of an in-depth analysis of Bitcoin realized volatility, we show that the volatility of Bitcoin prices is extreme (up to 30 times larger) compared to major currencies (US dollar, the euro and the yen). The positive volume - volatility relationship further suggests that the majority of trading is noise trading. Our findings imply that Bitcoin cannot function as a currency.

Keywords: Bitcoin, digital currency, medium of exchange, realized volatility

JEL Classification: C58, E44, F31

Suggested Citation

Baur, Dirk G. and Dimpfl, Thomas, Excess Volatility as an Impediment for a Digital Currency (March 1, 2018). Available at SSRN: https://ssrn.com/abstract=2949754 or http://dx.doi.org/10.2139/ssrn.2949754

Dirk G. Baur

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

Thomas Dimpfl (Contact Author)

University of Tuebingen - Department of Statistics and Econometrics ( email )

Germany

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