In a new research paper, the Swift Institute has analysed the dynamic relationship of virtual currency with fiat currency and has found that bitcoin is mainly used as a speculative investment rather than a medium of exchange.

The paper, entitled “Virtual currencies: Media of exchange or speculative assets?”, 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). 

One of the key findings from the research is that virtual currencies are unlikely to crowd out fiat currencies. It says that 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.

“Fiat currencies crowd out virtual currencies and that the design and size of virtual currencies deprives the currency from its intended use as a medium of exchange”, the paper reads. “More specifically, the demand for virtual currencies by potential users increases its price thereby also attracting speculators who drive the price further up reducing the currency’s property as a medium of exchange.”

In addition, the research found that bitcoin is mainly used as a speculative investment and that there exists no correlation between Bitcoin and traditional asset classes such as stocks, bonds and commodities.

“Analysing the Bitcoin public ledger, we find about a third of Bitcoins are held by investors, particularly users that only receive Bitcoin and never send to others”, it said.

Notably, the report states that virtual currencies pose no immediate macro risk. It says that 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.”