The volatility of Bitcoin and its role as a medium of exchange and a store of value
Dirk G. Baur and
Thomas Dimpfl ()
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Dirk G. Baur: University of Western Australia, Business School
Empirical Economics, 2021, vol. 61, issue 5, No 13, 2663-2683
Abstract Bitcoin is designed as a peer-to-peer cash system. To work as a currency, it must be stable or be backed by a government. In this paper, we show that the volatility of Bitcoin prices is extreme and almost 10 times higher than the volatility of major exchange rates (US dollar against the euro and the yen). The excess volatility even adversely affects its potential role in portfolios. Our analysis implies that Bitcoin cannot function as a medium of exchange and has only limited use as a risk-diversifier. In contrast, we use the deflationary design of Bitcoin as a theoretical basis and demonstrate that Bitcoin displays store of value characteristics over long horizons.
Keywords: Bitcoin; Digital currency; Medium of exchange; Volatility (search for similar items in EconPapers)
JEL-codes: C58 E44 F31 (search for similar items in EconPapers)
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