Research Shows Bitcoin Does Not Act Like Standard Currency

Researcher notes it does not trade against other currency like sovereign currency

The latest study to come out of New York University found that the Bitcoin’s behavior is based on speculative investment. The currency five-fold gain as compared to the dollar in November of 2013 prompted David Yermack of the Stern School of Business to look into the trading behavior of the non-traditional currency.

The probing found that the currency does in fact does not behave somewhat like a traditional currency. The general conclusion taking from the research was published in the National Bureau of Economic Research. In the study, Yermack stated the currency “does not behave like a currency at all” and has hallmarks similar to some Internet stocks that collapsed in the 1990s.

The Bitcoins history is short, spanning back to 2008, but the currency saw a rapid and effective spread, according to the Bitcoincharts. According to Mt. Gox, which handles the online exchanging of Bitcoins, the price of the coin moved to over $1,000 early within the year, as compared to the $12 from a year prior. As the currency is unrelated by central banks or sovereign governments, the rise of the currency caused an almost immediate debate regarding the legitimacy and practicality of the coin.

Yermack compared the currency against three basic characteristics of more traditional currency. According to Yermack, Bitcoin was used more and more for exchange because more companies began to accept it. It does not account or store the value of the unit, however, and in this way it fails to react like traditional currency.

The reason for the latter characteristic, or lack thereof, is due to it having “virtually zero correlation” with how the dollar trades against other currencies. That makes “its risk nearly impossible to hedge for businesses and customers and renders it more or less useless as a tool for risk management,” Yermack said.

“Since currency investors have no easy way to bet against Bitcoin’s appreciation, skeptics can only watch as optimists trade cute currency among themselves at ever-rising prices,” Yermack said.

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