While many are optimistic about the disruption virtual currencies such as Bitcoin will have upon fiat currencies, new research from the SWIFT Institute says that will likely not the be the case.
According to the paper, “Virtual Currencies: Media of Exchange or Speculative Assets?” SWIFT used a “theoretical model to analyze the dynamic relationship of virtual currency with fiat currency”. They found through their research and analysis that bitcoin’s main purpose is as a speculative investment, rather than a medium of exchange.
Since the price of virtual currencies is not fixed like government-issued fiat currency and is dependent on demand, users interested in using it would raise the price, and then speculative investors would raise the price further.
While fixing the virtual currency to a fiat currency would alleviate this problem, it would not align with the decentralized and free-market principles that bitcoin and many cryptocurrencies were designed by.
That does not mean anyone has attempted to do this. Tether, allows users to obtain digital tokens pegged to fiat currencies, the US Dollar, the Euro, and soon the Japanese Yen. Thanks to the Omni protocol, Tether exists as a layer above the Bitcoin blockchain, meaning for easy conversion between cryptocurrency and fiat, as Tether also allows you to receive and send bitcoin just as quickly as Tether.
With an almost $7 million market cap, and $1.2 million in volume (as of writing), Tether is looking pretty successful at number 32 on the top 100. It would be interesting to see if SWIFT came back and took into consideration the mechanics of Tether and how Gresham’s law, an economic principle which states that “bad money drives out good”, applies to virtual currencies as a medium of exchange.
The paper also reports that bitcoin’s market performance is uncorrelated with traditional investment vehicles such as stocks, bonds, and other assets like gold and silver, in times of economic uncertainty and economic normalcy.
That being said, bitcoin provides great diversification benefits due to this very fact. As investors know, spreading risk across different assets is the best way to reduce volatility. Even though bonds and stocks are different vehicles of investment, it is still quite easy to see some correlation when looking at chart returns.
Ironically, the very fact bitcoin can be quite volatile and not for reasons that would affect traditional stock classes makes it very appealing to investors, defined as users that receive bitcoin but do not send it, which SWIFT concludes is the majority of users at this point. With an “HODL” mentality strong in the Bitcoin ecosystem, SWIFT does not seem too far from the point here.
The last point they conveyed was that in bitcoin’s current state, it does not pose an immediate risk “for monetary, financial, or economic stability”. SWIFT also says that if adoption of virtual currencies increases largely on a global scale, it will cause a change in how monetary policy is conducted, given that oversight and regulation of bitcoin and other currencies with a decentralized nature would prove to be difficult.