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The volatility of Bitcoin and its role as a medium of exchange and a store of value

Author

Listed:
  • Dirk G. Baur

    (University of Western Australia, Business School)

  • Thomas Dimpfl

    (University of Tübingen, School of Business and Economics)

Abstract

Bitcoin is designed as a peer-to-peer cash system. To work as a currency, it must be stable or be backed by a government. In this paper, we show that the volatility of Bitcoin prices is extreme and almost 10 times higher than the volatility of major exchange rates (US dollar against the euro and the yen). The excess volatility even adversely affects its potential role in portfolios. Our analysis implies that Bitcoin cannot function as a medium of exchange and has only limited use as a risk-diversifier. In contrast, we use the deflationary design of Bitcoin as a theoretical basis and demonstrate that Bitcoin displays store of value characteristics over long horizons.

Suggested Citation

  • Dirk G. Baur & Thomas Dimpfl, 2021. "The volatility of Bitcoin and its role as a medium of exchange and a store of value," Empirical Economics, Springer, vol. 61(5), pages 2663-2683, November.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:5:d:10.1007_s00181-020-01990-5
    DOI: 10.1007/s00181-020-01990-5
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    More about this item

    Keywords

    Bitcoin; Digital currency; Medium of exchange; Volatility;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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