Cryptocurrency As Money: A Trading Strategy Solution

9 Pages Posted: 17 Aug 2019

See all articles by Marko Ogorevc

Marko Ogorevc

Institute for Economic Research (IER) Slovenia

Date Written: August 12, 2019

Abstract

This paper is motivated by a hypothesis that the long term value of a cryptocurrency is determined by its future use as money. For a cryptocurrency to be used as a medium of payment, it has to fulfill three independent functions: medium of exchange, a unit of account, and store of value. Currently, cryptocurrencies are held for investment purposes rather than being used for transactions and thus as a medium of exchange. For cryptocurrency to become widely adopted as a means of payment, it first needs to go through a very volatile period because speculative traders see long-run future value in the cryptocurrency. In order to soften transition from speculative asset to medium of payment a trading strategy is proposed, which provides liquidity and reduces volatility. Similar to pairs trading strategy, the proposed solution is based on cointegration and performed in three steps. The main difference is that proposed solution does not include shorting, but holding cryptocurrencies, thus increasing the total available cash and adding to the equilibrium price. Results from an ongoing experiment suggest that the proposed trading strategy is appealing for about 40% of cryptocurrency investors, as the struggle against volatility problem is accompanied by significant financial gains.

Keywords: bitcoin, cryptocurrency, volatility, trading strategy

JEL Classification: G11, G14

Suggested Citation

Ogorevc, Marko, Cryptocurrency As Money: A Trading Strategy Solution (August 12, 2019). Available at SSRN: https://ssrn.com/abstract=3436041 or http://dx.doi.org/10.2139/ssrn.3436041

Marko Ogorevc (Contact Author)

Institute for Economic Research (IER) Slovenia ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

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