A new research has been published by SWIFT Institute, focusing on digital currencies and their ability to crowd out fiat currencies in the global community.
According to the study, called “Virtual currencies: Media of exchange or speculative assets?”, assessing the relationship between virtual currencies, such as Bitcoin, and fiat currencies, and evaluating any kind of risks that virtual currencies pose to monetary, financial or economic stability.
The research was conducted by Dirk G. Baur, UWA Business School, KiHoon Hong, Hongik University College of Business in South Korea and Adrian D. Lee, University of Technology Sydney (Australia).
Key points of the research are:
- Virtual currencies not expected to remove the position of fiat currencies – The price impact of 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.
- Major intention of digital currency investors is purely speculative – An empirical analysis of Bitcoin prices and user accounts (wallets) supports the theoretical result and finds that Bitcoin is mainly used as a speculative investment rather than a medium of exchange.
- There is no correlation between Bitcoin and traditional assets – digital currency returns are uncorrelated with traditional asset classes such as stocks, bonds and commodities, both in normal times and during periods of financial turmoil.
- Virtual currencies pose no immediate macro risk – The design and the size of markets for virtual currencies such as Bitcoin do not pose an immediate risk for monetary, financial or economic stability.
“Contrary to conventional wisdom, our research shows that fiat currencies crowd out Bitcoin, not the reverse, and that the design and size of the Bitcoin market deprives the currency of its intended use as a medium of exchange,” says KiHoon Hong, Hongik University College of Business. “What is also evident is that Bitcoin poses minimal risk to financial or monetary stability. Despite this, if the acceptance of Bitcoin or other virtual currencies increases significantly on a global scale, it could have significant consequences on the relevance of monetary policy, as its decentralised and independent nature makes regulatory oversight difficult.”
Click here to see the full report.
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