Economic Analysis (Dec 2014)
Demystifying Bitcoin: Sleight of Hand or Major GlobalCurrency Alternative?
Abstract
Bitcoin, a peculiar crypto-currency has been the loudest buzzword in global finance over the last year or so, both for its spectacular and seemingly robust appreciation trend as well as for more recent equally ostentatious demise. After reviewing the history of bitcoin and specificities of its cyber-construct, this paper adds to the critical analysis of bitcoin as an international currency alternative. Lately, its volatility has been so excessive that it arguably cannot serve as a store of value. In addition, notwithstanding bitcoin's rising if bumpy credibility as a medium of exchange, since it has been immediately converted (by chief vendors) in either of the leading world currencies upon payment due to its extraordinary exchange rate volatility, bitcoin's unit of account potential appears to be dubious too. Moreover, bitcoin's next to none correlation with other major currencies' movements renders it unsuitable for managing FX risk or hedging purposes. Finally, having in mind that it lacks formal reserves or deposit-insurance scheme to back it up yet it's also prone to hacking, bitcoin resembles and behaves more like a pyramidal investment vehicle than a global currency alternative. Nevertheless, technology that made it be may still spawn an evolution in the way we posses things, transfer ownership and pay for goods and services in the near IT-ridden future.
