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The Digital Agenda of Virtual Currencies. Can BitCoin Become a Global Currency?

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This paper identifies and analyzes BitCoin features which may facilitate Bitcoin to become a global currency, as well as characteristics which may impede the use of BitCoin as a medium of exchange, a unit of account and a store of value, and compares BitCoin with standard currencies with respect to the main functions of money. Among all analyzed BitCoin features, the extreme price volatility stands out most clearly compared to standard currencies. In order to understand the reasons for such extreme price volatility, we attempt to identify drivers of BitCoin price formation and estimate their importance econometrically. We apply time-series analytical mechanisms to daily data for the 2009-2014 period. Our estimation results suggest that BitCoin attractiveness indicators are the strongest drivers of BitCoin price followed by market forces. In contrast, macro-financial developments do not determine BitCoin price in the long-run. Our findings suggest that as long as BitCoin price will be mainly driven by speculative investments, BitCoin will not be able to compete with standard currencies.

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File URL: http://publications.jrc.ec.europa.eu/repository/handle/JRC97043
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Paper provided by Joint Research Centre (Seville site) in its series JRC Working Papers with number JRC97043.

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Length: 48 pages
Date of creation: Sep 2015
Handle: RePEc:ipt:iptwpa:jrc97043
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  1. Nicolas Houy, 2014. "The economics of Bitcoin transaction fees," Working Papers 1407, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  2. François Velde, 2013. "Bitcoin: a primer," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Dec.
  3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  4. Dan Kovenock, 2002. "Fiat Exchange in Finite Economies," Economic Inquiry, Western Economic Association International, vol. 40(2), pages 147-157, April.
  5. Simon Gervais, 2001. "The High-Volume Return Premium," Journal of Finance, American Finance Association, vol. 56(3), pages 877-919, 06.
  6. Gautam Gowrisankaran & Joanna Stavins, 2004. "Network Externalities and Technology Adoption: Lessons from Electronic Payments," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 260-276, Summer.
  7. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
  8. Pantula, Sastry G., 1989. "Testing for Unit Roots in Time Series Data," Econometric Theory, Cambridge University Press, vol. 5(02), pages 256-271, August.
  9. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
  10. Rainer Böhme & Nicolas Christin & Benjamin Edelman & Tyler Moore, 2015. "Bitcoin: Economics, Technology, and Governance," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 213-238, Spring.
  11. Jamal Bouoiyour & Refk Selmi, 2015. "What Does Bitcoin Look Like?," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 449-492, November.
  12. Nicolas Houy, 2014. "The economics of Bitcoin transaction fees," Working Papers halshs-00951358, HAL.
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