Can Bitcoin Become a Viable Alternative to Fiat Currencies? An Empirical Analysis of Bitcoin's Volatility Based on a GARCH Model

52 Pages Posted: 2 May 2017 Last revised: 14 May 2017

Vavrinec Cermak

Skidmore College - Department of Economics

Date Written: May 2, 2017

Abstract

This study examines whether Bitcoin, a digital decentralized currency, can become a viable alternative to fiat currencies. Bitcoin currently does not fulfill the criteria of being a currency because it does not function as a medium of exchange, a unit of account, and a store of value. Bitcoin’s biggest obstacle from fulfilling these functions is the price volatility. A GARCH (1,1) model is used to analyze Bitcoin’s volatility in respect to the macroeconomic variables of countries where Bitcoin is being traded the most. Bitcoin already behaves similarly to fiat currencies in China, the U.S. and the European Union but not in Japan. There is also evidence that Bitcoin acts as a safe-haven asset in China. The volatility of Bitcoin has been steadily decreasing throughout its lifetime. If it follows the trend of its six years of existence, it will reach the volatility levels of fiat currencies in 2019-2020 and become a functioning alternative to fiat currencies.

Keywords: Bitcoin, Volatility, Cryptocurrency, GARCH

JEL Classification: F30, E60, E44, G15

Suggested Citation

Cermak, Vavrinec, Can Bitcoin Become a Viable Alternative to Fiat Currencies? An Empirical Analysis of Bitcoin's Volatility Based on a GARCH Model (May 2, 2017). Available at SSRN: https://ssrn.com/abstract=2961405 or http://dx.doi.org/10.2139/ssrn.2961405

Vavrinec Cermak (Contact Author)

Skidmore College - Department of Economics ( email )

Saratoga Springs, NY 12866
United States

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