SWIFT: Virtual currencies unlikely to crowd out fiat currencies
The paper, entitled “Virtual currencies: Media of exchange or speculative assets?”, looks at the dynamic relationship between virtual currencies, such as Bitcoin, and fiat currencies, and evaluates any immediate 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 Findings from the research include:
- Virtual currencies are unlikely to crowd out 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.
- Bitcoin is mainly used as a speculative investment – 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.
- No correlation exists between Bitcoin and traditional asset classes – Bitcoin 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.”