Given that Bitcoin has become much more popular in recent months we’re beginning to see some academic work coming out on the cryptocurrency. Academic work from the economists that is, looking at how well Bitcoin actually functions as a currency. And it has to be said that this particular paper doesn’t think it acts all that well as a currency: as a speculative investment yes. Here’s the abstract:
Motivated by Bitcoin’s rapid appreciation in recent weeks, I examine its historical trading behavior to see whether it behaves like a traditional sovereign currency. Bitcoin has exchange rate volatility an order of magnitude higher than the volatilities of widely used currencies, undermining Bitcoin’s usefulness as a unit of account or a store of value. Bitcoin’s daily exchange rates exhibit virtually zero correlation with bona fide currencies, making Bitcoin useless for risk management purposes and exceedingly difficult for its owners to hedge. Bitcoin also lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than like a currency.
It’s entirely possible that those attributes of a useful currency will appear at some point: although it’s also true that we’re seeing events that will restrict its usefulness, like the near complete closing down of the ability to trade yuan into or out of Bitcoin and the sealing off from the Chinese banking system.
There’s also more news from the wilder shores of the cryptocurrency world with Dogecoin:
About three weeks ago, Jackson Palmer, who by day works in Adobe’s Sydney marketing department, and who’d been following developments in the cryptocurrency world, absentmindedly tweeted, “Investing in Dogecoin, pretty sure it’s the next big thing.”
A lighthearted remark meant to lead nowhere at all. Until:
Meanwhile in Portland, Billy Markus had been trying to program his own digital currency that would appeal to a broader demographic than the profiteers who’ve flooded into Bitcoin. But the project had gone nowhere. Then he stumbled across Dogecoin.com within a day or two of the site going live.
“The first thing I said was, ‘This is so funny.’ Then I said, ‘I should just make this coin.’”
He Tweeted at Palmer saying he wanted to go in on it, and before Palmer even responded, started reconfiguring Bitcoin’s sourcecode, which is publicly available, to turn its user-facing elements into the doge meme.
Three weeks later we’ve a cryptocurrency with a market value of some $8 million ($4.3 million as I write myself). Which leads me to repeat myself. There is a bubble going on here in cryptocurrencies. And the proof is not in the behaviour of Bitcoin itself, it’s in the behaviour of the 60 so far listed currencies at coinmarketcap.com.
Remember what happened in the South Sea Bubble. The South Sea Company itself has a government monopoly. They had at least a chance at being a real company: a dreadfully over-hyped one it is true but there was the possibility there. The true proof of the bubble was the arrival of all of the other joint stock companies including, famously, that one to be about a great project but no one to know what it is. After the bubble was over the South Sea Company lived on for a century or so and did actually conduct business. Nothing to justify its peak price of course: but it was those other companies that disappeared into the ether. This is what is meant by bubble behaviour and this is indeed what we see happening. The proof isn’t in Bitcoin, the proof is in those copying it.
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