Bitcoin behaves more like a speculative investment than a currency, according to a new economic study.
Inspired by the virtual currency’s fivefold gain against the dollar in November, David Yermack of the Stern School of Business at New York University probed its historical trading behavior to see if it behaves like a traditional sovereign currency.
His conclusion, contained in a paper published by the National Bureau of Economic Research this month, is that it “does not behave like a currency at all” and has hallmarks similar to some Internet stocks that collapsed in the 1990s.
Introduced in 2008, Bitcoins have spread rapidly with about 12 million in circulation, according to Bitcoincharts. Their price soared above $1,000 earlier this year, compared with about $12 a year ago, according to Mt. Gox, an online exchange dealing in Bitcoins. Unregulated by central banks or governments, their rise this year prompted authorities to begin debating how to view them.
To test the case for Bitcoin as a currency, Yermack compared it against the three major characteristics of money: That it serves as a medium of exchange, a unit of account and store of value.
On this test, Bitcoin increasingly serves as a medium of exchange because more companies accept it, Yermack said. Where it fails is as a unit of account and store of value, he said.
That’s because its value is volatile and its exchange rate with the dollar “has virtually zero correlation” with how the dollar trades against other currencies. That makes “its risk nearly impossible to hedge for businesses and customers and renders it more or less useless as a tool for risk management,” Yermack said.
Bitcoin also lacks other characteristics associated with modern currencies, in that it cannot be deposited in a bank, there is no equivalent to deposit insurance for holdings of it, and no lenders use it as a unit account for standard transactions such as auto loans and mortgages, Yermack said.
“Bitcoin appears to suffer by being disconnected from the banking and payment systems of the U.S. and other countries,” he said.
The virtual currency is also hard to trade against, given no financial derivatives are based on it.
“Since currency investors have no easy way to bet against Bitcoin’s appreciation, skeptics can only watch as optimists trade the currency among themselves at ever-rising prices,” Yermack said.