hybrid between precious metals with intrinsic value and fiat currency backed by a monetary
authority. This paper analyses the question of whether Bitcoin is currency or investment and more
specifically, what is its current usage and what usage will prevail in the future given its
characteristics. We analyse the statistical properties of Bitcoin and find that it is essentially
uncorrelated with traditional asset classes such as stocks and bonds. The analysis of transaction data
of Bitcoin accounts shows that bitcoins are mainly used as an investment and not as an alternative
currency. Currently Bitcoin is “small” relative to the size of other asset classes and thus does not
pose an immediate risk for monetary, financial or economic stability
1. Introduction
According to Nakamoto (2008), Bitcoin is a peer-to-peer electronic cash system which allows online
payments to be sent directly from one party to another without going through a financial institution.
This definition suggests that Bitcoin is mainly used as an alternative currency. However, Bitcoin can
also be used as an investment and thus would serve a different purpose. This paper analyses the
question of whether Bitcoin is currency or investment and more specifically, what is its current usage
and what usage will most likely prevail in the future given its characteristics?
If Bitcoin is mainly used as a currency to pay for goods and services, it will compete with fiat currency
such as the US dollar and thus influence its value and ultimately monetary policy. If, on the other
hand, it will mainly be used as an investment, it will compete with other assets such as government
bonds, stocks and commodities among others and potentially influence financial stability. Whether it
is currency or investment, the potential to influence the economy as a whole depends on the success
of Bitcoin or similar alternatives compared to existing currencies and financial assets.
To answer the question of whether Bitcoin is currency or investment, we analyse the value of
Bitcoin’s financial characteristics relative to a large number of different assets and the usage of
Bitcoins; i.e. is Bitcoin mainly used as an investment or as an alternative currency to pay for goods
and services? We find that Bitcoin is mainly used as an investment despite or due to its high volatility
and thus high returns. Interestingly, Bitcoin returns are essentially uncorrelated with all major asset
classes which offers large diversification benefits. This low correlation, if stable and constant over
time, would also imply low risk from a macro perspective. For example, if Bitcoins showed bubblelike characteristics, a significant fall in the value of Bitcoins could be an isolated event if the
correlation remained at zero and thus no other assets would be affected. If, however, Bitcoin
investments are leveraged for example, a significant fall in the value could lead to margin calls and
then also affect other assets.
2. Background
Bitcoin is designed as a peer-to-peer payment system and thus a medium of exchange. It can be
defined as synthetic commodity money (e.g. Selgin (2014)) sharing features with both commodity
monies such as gold and fiat monies such as the US dollar. Whilst commodity money is naturally
scarce and has a use other than being a medium of exchange, fiat money is not naturally scarce but
issued by a central bank and its main purpose is that of being a medium of exchange. In addition, both
types of money can be used as a store of value and thus as an investment.
3
Bitcoin is a hybrid of commodity money and fiat money. Bitcoin is scarce by design, i.e. its scarcity
is determined by an automatic, deterministic rule fulfilled by competitive mining similar but not equal
to commodity money (e.g. gold) but its value is better characterised by fiat money as Bitcoins have
no “intrinsic” value.
When evaluating the potential future use and acceptance of Bitcoin it is important to analyse the
growth path of Bitcoin supply. The supply of Bitcoins is perfectly predictable, will continue to
increase until 2040 and remain at the 2040 level. This has strong implications for the value of Bitcoins
and the potential deflationary effects it may entail. Since the demand for Bitcoin is unpredictable both
in the near future and beyond 2040, it is difficult to forecast the future value and usage of Bitcoin.
However, the deflationary effects that are built into the system make it more likely that Bitcoins will
be used as a store of value and an investment than as a medium of exchange. If Bitcoins are not
viewed as an alternative currency and not used as a medium of exchange, it will not compete with
fiat currency and thus not affect the effectiveness of monetary policy. If, on the other hand, Bitcoins
are seen as a stable money benchmark and thus a potential medium of exchange, it may influence the
value of fiat currency and ultimately monetary policy.2
Given the potential influence of Bitcoins on fiat money and thus on monetary policy, central banks
and regulatory authorities may be well advised to carefully monitor the future developments of
Bitcoins and other “virtual currencies”.
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