29 June 2016

Virtual Currencies: Media of Exchange or Speculative Asset?

Analysing the dynamic relationship of virtual currency with fiat currency in price impact and returns.

Bitcoin can be defined as a peer-to-peer electronic cash system which allows online payments to be sent directly from one party to another without going through a financial institution. This definition suggests that Bitcoin is mainly used as an alternative currency. However, Bitcoin can also be used as an asset and thus would serve a different purpose. Whilst a currency can be characterised as a medium of exchange, a unit of account and a store of value, an asset does not generally possess the first two features and can be clearly distinguished from a currency.

This paper, “Virtual Currencies: Media of Exchange or Speculative Asset?”, finds that Bitcoin is mainly used as a speculative investment rather than a medium of exchange, and 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, it is argued that the design and the size of virtual currencies such as Bitcoin do not pose an immediate risk for monetary, financial or economic stability.

by Adrian Lee, Dirk Baur, KiHoon Hong

  • UTS Business School; Finance Discipline; University of Technology; Sydney