RIETI Report March 2018

Are Virtual Currencies Currency?

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.

This month's featured article

Are Virtual Currencies Currency?

OGAWA EijiFaculty Fellow, RIETI

Bitcoin bubble and burst

Cryptocurrencies or virtual currencies such as Bitcoin are at the center of a scandal. Bitcoin's exchange rate against the U.S. dollar, which stood at 997.73 USD/BTC at the beginning of 2017, made an uninterrupted climb and peaked at 19,289.79 on December 17, 2017, rising 19-fold over a period of 11.5 months. From that day onward, Bitcoin trended downward, plunging to 6,838.82, roughly one-third of its peak value, on February 5, 2018. In the midst of this collapse came the Coincheck incident in January. Coincheck, an exchange for virtual currencies including NEM, was robbed of 58 billion yen worth of NEM belonging to its customers, prompting the Financial Services Agency (FSA) to conduct an onsite inspection into the company as well as other virtual currency exchange operators. Also, we all remember another related scandal, in which Mt. Gox, a Tokyo-based Bitcoin exchange, had to halt all Bitcoin withdrawals.

As shown in the below Figure, Bitcoin's exchange rate against the U.S. dollar has changed drastically over the years, having undergone two bubble-and-burst episodes. Bitcoin's exchange rate against the U.S. dollar surged more than 11-fold over a 3.5-month period, from 100 in mid-August 2013 to 1,151, the peak value at the time, on December 4, 2013. However, Bitcoin tumbled shortly afterward, falling below 500 at the end of March 2014 with half of its value lost in 3.5 months. Then came the 19-fold elevation and the subsequent free fall in 2017. Such a rapid and continuous escalation 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.

To read the full text
https://www.rieti.go.jp/en/columns/a01_0493.html

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