Is Bitcoin a Real Currency?

Abstract

Abstract: 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. Late 2013 became an auspicious time for Bitcoin, a “virtual currency ” launched five years earlier by computer hobbyists. During the month of November 2013, the U.S. Dollar exchange rate for one Bitcoin rose more than fivefold, and the value of one Bitcoin, which had begun trading at less than five cents in 2010, exceeded $1,200.00. Two days of hearings were held by the U.S. Senate Commitee on Homeland Security and Governmental Affairs, at which government regulators testified that virtual, stateless currencies like Bitcoin had the potential t