Study finds that Bitcoin does not behave like a currency...

[joepie91]

... where the word "currency" is redefined, to encompass the exact characteristics of traditional banking and government-issued money. Gosh, I wonder what the outcome of that would be!

http://www.bloomberg.com/news/2013-12-23/bitcoin-more-speculative-than-real-currency-study-finds.html

 

[drmike]

Is Bitcoin a Real Currency?
David Yermack

NBER Working Paper No. 19747
Issued in December 2013
NBER Program(s): LE ME

Motivated by Bitcoin’s rapid appreciation in recent weeks, I examine its historical trading behavior to see whether it behaves like a traditional sovereign currency. Bitcoin has exchange rate volatility an order of magnitude higher than the volatilities of widely used currencies, undermining Bitcoin’s usefulness as a unit of account or a store of value. Bitcoin’s daily exchange rates exhibit virtually zero correlation with bona fide currencies, making Bitcoin useless for risk management purposes and exceedingly difficult for its owners to hedge. Bitcoin also lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than like a currency.

$5 to buy the report/study....

http://www.nber.org/papers/w19747

 

[DomainBop]

bitcoin performs exactly like a 1630's tulip bulb or a 1990's dot com stock...and the market psychology of bitcoin investors is similar to that of investors during those two periods.

 

[joepie91]

bitcoin performs exactly like a 1630's tulip bulb or a 1990's dot com stock...and the market psychology of bitcoin investors is similar to that of investors during those two periods.

That, however, has nothing to do with whether it is a currency or not, nor with its currency-related characteristics.

EDIT: Additionally, hype is not a phenomenon exclusive to currency or speculation, and definitely not one that only has a few examples of it occurring. Hypes (resulting in irrational investing) occur quite literally all the time.

 

[texteditor]

Even when Silkroad existed it wasn't a currency, at best Bitcoin is only a clandestine payment processor

 

[joepie91]

Even when Silkroad existed it wasn't a currency, at best Bitcoin is only a clandestine payment processor

Ah, I see you're still around as well.

Shame that the dictionary disagrees with you.

 

[tchen]

Currency in economic papers tend to refer to 'modern' currency designs which differs from commodity currencies on which bitcoin was designed. As domainbop pointed out, tulips were a viable alternative of wealth for a short period of time, marking it as a proto currency. Frankly, any medium of exchange can be labelled as one if your umbrella is wide enough.


If you get hung up on the term currency though in this case, you're missing the wood for the trees. Modern currencies are designed the way they are for very specific reasons of stability and market making. The paper addresses these criteria to see whether it can be a viable alternative. Is it leading the question? Sure, as no one who studies economic history would even think bitcoin was a good idea.

 

[Mun]

I wouldn't consider bitcoins a currency. They are too volatile. One of the great things about US currency is that I can go down the street and buy a hamburger for $8.00 (for a good one). I can come back a year later and it is roughly the same price, maybe $8.25. However with bitcoins I could a year ago give 1 bitcoin for a hamburger, and today I would barely be able to give it a 1% of a bitcoin. Literally speaking, I am far better off paying in US dollars and using US dollars as a currency, then using bitcoins. Bitcoin i see something as more along the lines of an "investment" where you can quickly make a profit, or loss defined upon the dynamics of the market.

Currencies of the modern era will automatically burn, and create new units to keep the value stable, where bitcoin simply doesn't.

Mun

 

[joepie91]

Modern currencies are designed the way they are for very specific reasons of stability and market making.

Citation needed. The primary reason I'm seeing for "currencies being designed the way they are", is benefit to some kind of centralized party somewhere.

I wouldn't consider bitcoins a currency. They are too volatile. 

"Currency" isn't determined by volatility.

However with bitcoins I could a year ago give 1 bitcoin for a hamburger, and today I would barely be able to give it a 1% of a bitcoin. 

That is actually not a problem inherent to Bitcoin. It's simply a consequence of the (right now) very small liquidity. Everything that happens has a relatively large impact.

Currencies of the modern era will automatically burn, and create new units to keep the value stable

Burn and create new units? Huh?

where bitcoin simply doesn't.

That is a feature, not a bug.

EDIT: Did I mention that I despise the quoting mechanism in IPB? :|

 

[Mun]

After WW I the German currency was printed in excess to help pay off debts to France and the UK. As such it commonly took a whole wheel barrel full of money to buy one loaf of bread. As such, people stopped using it as a currency, and instead burned it to keep warm. This proves that a currency that becomes to volatile will be pushed aside for other means to purchase goods.

Actually it is an issue. I wouldn't want to have a currency that is changing on that magnitude. It would mean that I as a seller of an item would constantly need to fluctuate my prices, and I as a buyer would constantly have to make sure I am not getting ripped off due to massive market changes.

The US government will burn dollars (literally) if there is too much cash in circulation or use the central bank to hold  excess funds during times when the currency is falling in value. During times when the value is climbing too fast the Treasury will print extra units to help compensate to keep the value stable. 

That feature means it is not a currency, it is simply a unit of exchange at best. I wouldn't purchase things with bitcoins, I would invest some money in bitcoins (maybe), but I wouldn't purchase things with it.

Mun

 

[drmike]

I have gripes about BitCoin.  Conceptually it is swell, a good proof of concept.  Alpha to beta revision.

The privacy / tracking of coins.  It is arguably less anonymous than paper money or buying gold.  Nuts that random people can point to some purchase of a Ferrari based on public transaction data.  Next week they'll be identifying dope users, porn addicts and other folks squandering their e-currency.

Possession - unlike gold, hard to trade bitcoins in SHTF scenario.  Could be literally worthless.  Metals though still will have value and have proven themselves in said scenarios prior.

Volatility - look at recent price swings of Bitcoin... Over $1200, right?   Dropped quite a bit recently.  Nice if you bought at low low prices and held.  Ugly if you bought at $800 and above per Bitcoin.

1%'ers ---  most Bitcoins are owned by less than 1k people.   When we go back to the 99% vs. the masses movement, you get centralization of wealth like that.   BitCoins appear to have their ruling elite financially.  For all I know, it is the same mockery by deep pocketed folks who don't work but manipulate money to make more money they don't really need.

 

[tchen]

Citation needed. The primary reason I'm seeing for "currencies being designed the way they are", is benefit to some kind of centralized party somewhere.

A Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed

NBER Working Paper No. 12711  Rose, Andrew K.

"These countries place few restrictions on capital mobility and allow their exchange rates to float.... This system was not planned and does not rely on international coordination. There is no role for a center country, the IMF, or gold. It is durable; in contrast to other monetary regimes, no country has been forced to abandon an inflation-targeting regime."

Ironically, what we have is the most decentralized currency system ever.

Note that the paper was published in the infant stages of the financial crises.  Despite that, the observations still hold.  With hindsight, the overall system, which relies heavily on information held by the market participants, does have a vulnerability in collective information myopia.  Oh well, I never said it was perfect. 

Market making is also a vital part of the foreign exchange system.  Capital mobility allows for covered interest rate parity to hold.  The political risk factors in the forward rate formula is minimal because they're all low-intervention floating currencies.  And thus, for the most part, deviations are kept to a minimum.  The system is setup to publish economic data and forecast interest rates with reasonable accuracy.  The end effect is that hedgers wanting to buy forward rate contracts, can now do so at minimal transaction costs.  Why is that important?

Because at the end of the day, a monetary system is meant FOR long distance trade.  Bartering could otherwise have served for everything else.  And in order for trade to occur, hedging tools are needed to minimize risk.  Volatility itself isn't a bad thing.  I don't think BTC's volatility is bad.  What's bad is the lack of fundamentals governing its current price dynamics.  You're not going to see any serious market makers other than pure speculators.  Those don't last very long and they're isn't an infinite supply of them.