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 psychology of Bitcoin users plays an important role in limiting its influence on fiat currencies any time 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 […]
