Cryptocurrencies or virtual currencies such as Bitcoin are in turmoil. Besides Bitcoin's exchange rate against the U.S. dollar rising 19-fold over a period of 11.5 months and subsequently plunging to roughly one-third of its peak value on February 5, 2018, there have also been scandals involving Coincheck, which was robbed of 58 billion yen worth of NEM virtual currency, and the Mt. Gox incident from 2014. The rapid and continuous escalation of Bitcoin followed by a sudden free fall are nothing but the creation and collapse of a speculative bubble, and this process has been repeated over time. In the March issue of the RIETI Report, we present "Are Virtual Currencies Currency?" by Faculty Fellow Eiji Ogawa.
Ogawa first briefly discusses the details of Bitcoin and explains that a real currency fulfills three functions: 1) unit of account, 2) medium of exchange, and 3) store of value. Bitcoin's shortcoming is that it only addresses the medium of exchange, and lacks the storage of value, and Ogawa expounds on this by stating that a virtual currency accepted only within a specific closed world where it is used as a means of settlement cannot be defined as a currency functioning properly as a medium of exchange. He then addresses Bitcoin's ability to store value, but finds that its heavy volatility and drastic changes in value makes it a poor store of value. Finally, Ogawa acknowledges the positive aspect of virtual currencies, wherein their blockchain technology provides an excellent means of settlement and should be appreciated.
