Is Bitcoin a threat to the traditional monetary system and financial institutions? A group of SWIFT Institute researchers refuse to believe so. A working paper titled “Virtual Currencies: Media of exchange or speculative asset?” published by Dirk G Baur, Kihoon Hong and Adrian D Lee analyzes the dynamic relationship between both the currencies.
In the report, they present a theoretical model used to gauge the potential impact of Bitcoin and other digital currencies on fiat currencies. As per their findings, Bitcoin and other digital currencies are tools for speculative investment at best. The volatile nature of Bitcoin, brought about by speculative trading adversely impacts the digital currency’s ability to serve as a medium of exchange.
The authors have reported that an analysis of current trends in Bitcoin usage by comparing Bitcoin wallets and market price supports their theoretical prediction. A lack of correlation between Bitcoin and fiat linked traditional asset classes is also seen as a reason for Bitcoin to continue being a currency for speculation rather than an exchange of value.
Bitcoin Community Preventing the Rise of Bitcoin
While factoring in the demand-and-supply model, they believe that the Bitcoin users’ psychology plays an important role in limiting its influence on fiat currencies anytime soon. An increase in Bitcoin usage inadvertently results in an increase in its price. However, the rate of increase in its value is further accelerated by speculators who jump in when the currency is performing well. This leads to an increase in speculative trading, which in turn reduces the supply of Bitcoin for its intended usage as a medium of exchange.
Speculations serve as a self-controlling mechanism, preventing the use of Bitcoin and digital currencies as a reliable medium of exchange. On the other hand, the sheer number of users and supply of fiat currency in the system makes it much more stable, eliminating any undue influence, lest from Bitcoin.
All Is Not Lost
The SWIFT Institute paper also offers a solution, which involves fixing the value of the digital currencies like Bitcoin. But such changes will adversely affect the very fundamentals of Bitcoin and other digital currencies, designed to be decentralized and libertarian, promoting free-market.
The SWIFT Institute researchers have not completely discounted Bitcoin or its potential to become a preferred medium of exchange. In order to realize that, the Bitcoin community has to stop using Bitcoin only for investment purposes. More the digital currency is used for transactions, better chances it has to become mainstream.
Ref: SWIFT Institute | Image: NewsBTC