E_Gavotti (2016) - Bitcoin as a currency_A volatility analysis

Bitcoin as a currency:
A volatility comparison against emerging market currencies
Eduardo Gavotti†
Abstract:
Since its inception, Bitcoin has been a source of debate amongst academics, technology enthusiasts,
participants from the financial services industry and government institutions. The predominant
consensus is that Bitcoin’s volatility is not comparable to that of the most widely used currencies. This
opens the space for questioning in relation to other currencies, and in particular to those of emerging
markets. This paper aims to provide a comparison of Bitcoin and a set of five emerging market
currencies, in light of the arguments regarding volatility, and whether an increase in the number of
transactions has been responsible for a decrease in volatility. Evidence has been found on specific
periods of time when the volatility of Bitcoin has been lower than the volatility of emerging market
currencies; however these cases have been the exception. In addition, although volatility has decreased
over time, an increase in the number of transactions does not seem to explain this decrease, but rather
the opposite.
Keywords: bitcoin, emerging markets, volatility, cryptocurrencies
†
London Metropolitan University. Dissertation submitted to obtain the academic degree of MSc in International Banking, Finance and
Compliance. edg0068@my.londonmet.ac.uk

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1. Introduction
Innovation has been an engine which has served as a source of economic growth over time (WEF,
2014), generating new ideas which combine different needs of societies with technological advances.
In particular, financial innovation has helped societies to bring markets closer together at a significant
speed. From the creation of paper money to e-commerce the financial services industry has not stopped
evolving, thus, enhancing demand and its correspondent effects on production of goods and services,
as stated by the World Economic Forum (2014).
When looking at the evolution of money, currencies and payment methods since their inception,
mankind has seen from “one-foot-square pieces of white deerskin with colourful borders” (Edge, 2014),
to credit cards and same-day electronic bank transfers. Yet, perhaps the most important moment in
financial history, in the evolutionary sense, was when the gold standard was abandoned in favour of the
fiat currency system in the United States in 1971, 27 years after the Bretton Woods Conference. The
fiat system implemented meant that the US dollar would then dominate the international monetary
system, which would be sustained by the credibility and trustworthiness of the Federal Reserve as issuer
of the currency, and ultimately, the economy of the United States of America. Since then, the expansion
and development of financial services, as well as the introduction of new currencies such as the Euro in
2002, have all occurred within this fiat framework.
The introduction of Bitcoin as the ultimate virtual currency (or “cryptocurrency”), or as described by
its creator, Satoshi Nakamoto, “a peer-to-peer electronic cash system” (2008) has been, perhaps, one of
the most significant financial innovations of the internet era. The idea of having a system whereby “a
purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one
party to another without going through a financial institution” (2008) opened the world for the debate
on the possibility of a paradigm shift; especially in the economic context of the financial crisis of 2008,
which has affected considerably people’s trust in financial institutions, and in particular central banks
(Roth, 2009).
Much has been said about Bitcoin since its inception in 2008 and launch in 2009. Several authors such
as Yermack (2014) and Fama (2015) suggest that Bitcoin fails in meeting the traditional definition of
money: as medium of exchange, store of value, and unit of account; on the one hand, and that its
volatility is significantly higher than those of widely-accepted currencies. Thus, it appears to behave
more as a speculative investment than a currency (Glaser et al, 2014). Others suggest that, at present,
Bitcoin and digital currencies may act as money in certain cases for relatively few people (Ali, 2014),
provided that the extent to what an asset can serve these roles (i.e. medium of exchange, store of value
and unit of account) may vary from person to person and from time to time. In addition, governmental
institutions such as the European Union’s Court of Justice have ruled that Bitcoin should be treated as

3
a currency for tax purposes (2015), whereas in other jurisdictions such as the United States, the
treatment is that of a commodity.
But where there is a degree of consensus within traditional market participants and the advocates of
Bitcoin is in regards to the applicability of the main innovation behind cryptocurrencies: the “Block
Chain”. The Block Chain, however, is a broader concept that involves Bitcoin in the sense that it is
where all transactions are verified and recorded, allowing transparency within the network. In other
words, Bitcoin is the largest existing and active block chain (Anastopoulos, 2015).
This paper, presented as a pre-requisite to receive the title of Master of Science in International Banking,
Finance and Compliance, focuses on the questions of the economic definition of money and the
argument of volatility to determine whether Bitcoin, as of present date, can be classified as a currency
based on the arguments of Ali (2014) and Yermack (2014). The relevance of the topic is significant
given the rapid advances of technology in the financial services industry, and the impact that such
innovation has had in the context of the information technology era.
The main hypothesis is that Bitcoin volatility is more comparable to that of the currencies from
emerging markets (as opposed to the major currency pairs), given the elasticity of these currencies to
external shocks, and therefore could not be disregarded as a currency on its own. This hypothesis is
tested with a secondary hypothesis: Bitcoin volatility has been decreasing over time as a result of an
increase in transactions.
The following objectives are expected to be achieved with this paper: 1) Gaining understanding on the
evolution of money and payment systems; 2) Assessing the technical and financial aspects of Bitcoin,
in light of the definition of money; 3) Comparing Bitcoin with a set of five currencies from emerging
markets in relation to price and volatility; 4) Assessing the effects of an increase in the number of
transactions on Bitcoin volatility; and 5) Contributing to further research about Bitcoin and other digital
currencies.
The paper is divided into 5 chapters. Chapter 1 introduces the topic of discussion, following the
corresponding literature review on chapter 2: firstly on Bitcoin in order to understand how it works,
what has been said in relation to its use as money, as well as the main arguments for and against a wider
adoption of Bitcoin as a currency; and secondly the literature on historical price volatility and its
relationship to the definition of money. Having covered the theoretical framework, chapter 3 describes
the hypothesis, the methodology for a comparative analysis between the historic volatility of Bitcoin
against the US Dollar (BTCUSD) and a set of five currency pairs, also against the US Dollar: South
African Rand (USDZAR), Brazilian Real (USDBRL), Russian Ruble (USDRUB), Colombian Peso
(USDCOP), and Turkish Lira (USDTRY), as well as the data used. The findings and analysis are
presented on chapter 4 for discussion, to then finalise with the conclusions and recommendations on
chapter 5.

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2. Literature review
2.1 A brief history of money, currencies and payment systems
Economic history can be seen as the study of the different production systems and the ways in which
societies organised themselves to produce, distribute and consume goods and services over time. But it
also can be divided in two moments: before and after the establishment of the current international
monetary system (i.e. the fiat system). From feudalism to the industrial revolution which gave birth to
capitalism, and then to modern times of the information era, money has played a central role as medium
of exchange, store of value and unit of account.
According to Edge (2014), humans started using cowries as a form of currency by 1200 B.C., and it
appears that cowries were the most widely and longest-used currency in history. The first appearance
of metal money occurred around 1000 B.C. in China, and these were bronze and copper imitations of
cowries. Going further west, the first metal coins were from around 500 B.C., made of silver and
showing the images of emperors and gods to designate their authenticity. Continuing with Edge, square
pieces of white deerskin were used as the first forms of “paper money”, also used in China around 800
A.D. It was not until three centuries after that the use of paper money would be considered common in
China and Europe (2014).
Going forward in time, the most ancient bank in the modern sense was the Bank of Venice which was
established in 1157 (Gilbart, 1834), setting the precedent for the evolution of the international monetary
system, trade and economic development. The way it worked started with the state being involved in
debt, and the public creditors forming a corporation in which the debts were allowed to be transferred
from one name to another. By way of a particular regulation, all payments and bills of exchange were
to be made in “bank money” (1834).
When goldsmith banks emerged in the XVI century they kept ledgers of their customers’ deposits which
enabled payments to be made by making changes in the ledgers rather than physically exchanging these
assets (Ali, 2014). But this only worked for customers within the same bank. There was then a need for
interbank payments which led to the emergence of a central bank, with which all banks could participate
by way of holding accounts at it. According to Ali (2014), this process of making payments by reducing
the balance in the sender’s account and increasing the balance in the recipient’s account by an equivalent
amount, has not changed since the XVI century.
Money is perhaps one of the few concepts of which economists have reached consensus. Ali (2014)
from the Bank of England summarises the definition of money by identifying the roles that it plays in
society: Something may be considered money from the perspective of economic theory to the extent
that it serves as:

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a. a medium of exchange with which it is possible to make payments;
b. a store of value with which it is possible to transfer the ability to buy goods and services from
today to a future date; and,
c. a unit of account with which it is possible to measure the value of any particular item for sale.
Furthermore, Ali states that in order for any form of money to function as a medium of exchange, there
needs to be a payment system as a way of transferring value, and for any system other than the direct
physical exchange of banknotes or coins, a ledger to record the transactions.
Technological developments, and in particular, the appearance of the internet as the world wide web of
information, allowed banks and financial institutions to innovate on several payment methods, whilst
keeping that same principle upon which the banking system was built. Developments such as electronic
transfers, e-wallets, mobile payments are all underpinned by the trust system in which the customers
rely on the banking institutions and the entities that regulate these for the accurate and timely processing
of their transactions. However, episodes such as the great depression, the collapse of Lehman Brothers
in 2008 and the subsequent global financial crisis, as well as other financial crises have had an enormous
impact on the financial markets and institutions by undermining citizens’ trust (Roth, 2009). Hence,
society appears to be moving towards the “end of middlemen” by applying technological advances to
bring closer senders and receivers, buyers and sellers, much in the same way as the e-mail replaced
traditional mail services (Hemmadi, 2015).
2.2 What is Bitcoin?
In the words of its creator, Satoshi Nakamoto, Bitcoin is “a peer-to-peer electronic cash system that
allows online payments to be sent directly from one party to another without going through a financial
institution” (2008). The novelty with this payment system is that it is based on cryptographic proof
instead of trust, thus “allowing any two willing parties to transact directly with each other without the
need for a trusted third party” (2008). Interestingly, contrary to the popular belief, the idea of a
‘cryptocurrency’ or money that uses cryptography instead of a central authority to control its creation
and transactions was first introduced by Wei Dai in 1998 on the “Cypherpunks Mailing List”1
according
to Bitcoin’s main website, bitcoin.org. Following Böhme et al (2015), Bitcoin can be understood as the
first widely adopted mechanism to provide absolute scarcity of a money supply; this is because from
inception, the total possible supply of Bitcoins is capped at 21,000,000. As a result, Bitcoin does not
operate as a system based on debt, but rather on ownership (Antonopoulos, 2015).
One of the main problems associated with previous versions of digital forms of currency is the double-
spending problem. This means when it is possible to spend the same digital token, twice. As a result,
there has been the need for a trusted third party (i.e. a financial institution) in order to minimise fraud.
1
The Cypherpunks Mailing List is a mailing list for discussing cryptography and its effects on society https://www.cypherpunks.to/list/

6
However, Nakamoto argued that a certain percentage of fraud is accepted as unavoidable (2008). In this
sense, he proposed a solution to the double-spending problem using a timestamp server to verify
transactions in a chronological order, and this system would be secure “as long as honest nodes
collectively control more CPU power than any cooperating group of attacker nodes” (2008). This
timestamp server used to verify the transactions is known as the Block Chain, which in essence is where
all Bitcoin transactions are verified and recorded, and it is a publicly available distributed ledger which
can be accessed on-line2
.
Following Antonopoulos (2015), to understand Bitcoin and the Block Chain, one can refer to the time
when the internet and e-mail were invented. Antonopoulos suggests that in the beginning, people could
not distinguish between e-mail and the internet, and makes an analogy to Bitcoin in the sense that
Bitcoin is to the Block Chain as e-mail is to the internet (2015). Moreover, he adds that Bitcoin is the
largest existing and active block chain.
Interestingly, in an interview made to Eugene Fama, conducted by the website Coin Telegraph in July
2015, the former compared Bitcoin to a checking account:
“…To me it seems like I really don’t know the difference between bitcoin and a checking
account. I read all these papers in the 80s about how when you conduct transactions to a bank
you check a wire that’s really just an accounting system for exchange… running in the
background to clear accounts. And it seems that bitcoin is pretty much the same thing. It’s an
accounting system of exchange. I don’t know, maybe it’s a better protocol or whatever, but I
don’t really know the difference between the two.”3
Thus, Bitcoin can be defined as a decentralised, online payment system based on cryptographic proof
as opposed to trust in third parties, which allows payments to be sent and received instantaneously
between the parties. What happens with this system is that it allows to both produce and transact with
its own form of currency, as opposed to transact with fiat currencies, for which you would need to use
the traditional financial system.
2.3 How are Bitcoins issued?
Bitcoins are not issued by a centralised authority, but rather found or discovered through a process
called “mining”. The term comes as an analogy after the process by which gold miners utilise resources
to add more gold to circulation (Nakamoto, 2008). As explained on the Bitcoin Wiki4
, each block
contains three main pieces of information: a record of some or all recent transactions, a reference to the
2
The Block Chain is publicly accessible via the following url: https://blockchain.info/
3
http://cointelegraph.com/news/115593/nobel-prize-winner-eugene-fama-on-bitcoin
4
The Bitcoin Wiki is a public resource for and by the community of Bitcoin users, developers and businesses, can be accessed via the
following url: https://en.bitcoin.it/wiki/Main_Page

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immediately precedent block, and an answer to a complex mathematical “puzzle”, “the answer to which
is unique to each block” (2015). The process of mining consists then in a competition to find the answer
to the “puzzle” which solves the current block. Although a complex problem, once the solution is found,
it is relatively easy for the rest of the network to confirm that the solution is correct. Mining, and thus
the puzzle-solving is done automatically using computing power, and its difficulty is automatically
adjusted by the network in such way that it targets an average of 6 blocks solved per hour5
.
The incentive for miners is that they obtain a number of Bitcoins as a reward for each block created in
the block chain. An additional incentive is to allow miners to collect the fees associated with each
transaction made after the blocks added, since every new block added to the chain generates the
possibility of a number of transactions. These transaction fees, however, are not mandatory, and the
miners can opt not to include these transactions in their blocks. Nakamoto hypothesised that once a
predetermined number of Bitcoins have entered circulation, the incentive can move entirely from
reward to purely transaction fees (2008), and this is because the reward halves with every 210,000
blocks created. The reward currently amounts to 25 Bitcoins per block created. Nakamoto (2008) also
hypothesised that this incentive may encourage honesty:
“If a greedy attacker is able to assemble more CPU power than all of the honest nodes, he
would have to choose between using it to defraud people by stealing back his payments, or
using it to generate new coins. He ought to find it more profitable to play by the rules, such
rules that favour him with more new coins than everyone else combined, than to undermine the
system and the validity of his own wealth.”
In essence, it is the miners who verify transactions, so the more transactions they verify and validate,
the more fees they can collect. Thus, incentives are aligned. Mining then is not only the process of
adding more Bitcoins to the network, but rather to continuously secure the network with each
verification, which is rewarded with either new Bitcoins, transaction fees, or both.
2.4 How are payments in Bitcoin processed?
Bitcoin payments are processed via Bitcoin wallets. A wallet is an application which is installed in a
computer or mobile device and connects to the block chain, allowing then the confirmation of
transactions and the calculations of spendable balance. Once installed, the wallet generates a Bitcoin
address, which is an identifier in the same way as a bank account number, and this address can be
disclosed to third parties so that payments can be sent and received.
5
As of 30 November 2015, the average mining rate was 6 blocks every 57.1 minutes, as seen on
https://bitcoinwisdom.com/bitcoin/difficulty

8
According to the website bitcoinwiki.org, the main functionalities of wallets can be summarised as
follows:
 Storage of Bitcoin addresses and corresponding closed/open keys on users computer in
“wallet.dat” file;
 Conducting transactions for obtaining and transferring Bitcoins (BTC)
 Providing information about the BTC balance at all available addresses, previous transactions,
and spare private keys.
Users can create an unlimited number of addresses. However, because a Bitcoin address does not
contain information about the owner, creating many addresses increases the level of anonymity of the
payments (2015)6
.
A payment then occurs when transferring value from one Bitcoin address to another, after the
transaction is included and verified in the block chain. Every payment is signed via a private key, which
is a secret piece of data equivalent to a password or a personal identification number (PIN), and provides
a mathematical proof of ownership of the wallet by a particular user.
Following Böhme et al (2015), to better understand the Bitcoin payment cycle they use an example
with three hypothetical users participating in a transaction, named “Charlie”, “Bob”, and “Alice”:
 Charlie received 3 bitcoins;
 Charlie does not simply “hold” 3 bitcoins, he rather participates in a publicly verifiable
transaction showing that he received 3 bitcoins from Bob;
 Charlie was able to verify that Bob could make that payment because there was a previous
transaction in which Bob received these 3 bitcoins from Alice, and there was no prior
transaction in which Bob spent these 3 bitcoins.
From this it can be seen the transaction recording process that takes place in the block chain. With the
double-spending problem solved, Bitcoin users can then be sure that the payments received are not
Bitcoins already spent, because the transactions which originated these payments have been
successfully verified by the network and all of the information is auditable in the block chain.
2.5 What is the current state of Bitcoin?
The firm CoinDesk7
produce and release a quarterly report via its website called ‘The State of Bitcoin
Report’. The report covers a set of information including: summary and adoption, price and valuation,
media and sentiment, investment and M&A, use cases and commerce, state of Blockchain, technology,
and regulation and macroeconomics. The latest ‘State of Bitcoin Report’ was released on 15th
October
6
http://en.bitcoinwiki.org/Bitcoin_address
7
www.coindesk.com

9
2015 covering the year’s 3rd
quarter, produced by Dr. Garrick Hileman from the London School of
Economics.
According to Hileman (2015) there are 23 countries with venture capitalists (VC) backing Bitcoin start-
ups, and the overall VC investment in these start-ups to date is USD 921 million. In fact, Bitcoin is the
fastest growing area of start-up investment, growing at a rate of 151% between 2012 and 2015, with the
majority of the investment focused on infrastructure and mining. On a previous edition of the State of
Bitcoin, the source of funding of these VCs was worthy of attention, due to the influence that these
investors could have on the business ecosystem (Frisby, 2015): Richard Branson, the founder of Virgin;
Vikram Pandit, former CEO of Citigroup; Marc Andreessen, Netscape pioneer; Tom Glocer, CEO of
Thomson Reuters; and PayPal founders Peter Thiel and Max Levchin, as well as eBay co-founder Jeff
Skoll, are within the list of businessmen and entrepreneurs behind Bitcoin start-ups. However, Hileman
also comments that on a quarterly basis, VC investment growth rate has decreased from 21% on Q2
2015 to 11% in Q3. It is not clear if this is due to seasonal factors or due to a less attractive funding
environment.
The number of daily transactions according to this report has grown from 79,812 as of end 2014 to
140,970 as of end of September 2015. These metrics are publicly available at the blockchain.info
website.
Bitcoin price has also dropped on a year-on-year basis, from $380.5 as of 30th
September 2014 to
$236.83 as of 30th
September 2015. However, there are further references to Bitcoin’s price ahead in
this paper.
Table 1 - Key Statistics on Bitcoin
Sep-15 Sep-14 ∆
Commerce
Wallets 11,051,719 6,559,978 68%
Merchants 106,000 76,000 39%
Merchants' annual revenue ($bn) 190 90 111%
ATMs 475 238 100%
Unique Bitcoin addresses 272,223 184,554 48%
Industry
All-time VC investment ($m) 921 326 183%
Number of VC-backed startups 119 73 63%
Media
Mainstream media mentions 411 631 -35%
Blockchain
Companies trial blockchain 41 3 1267%
Technology
Network hashrate (billion/second) 457,184,328 261,900,382 75%
Valuation
Bitcoin market capitalisation 3.5 5.2 -33%
Source: CoinDesk

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According to the website CoinMarketCap.com8
(2016) there are 652 cryptocurrencies known, of which
124 have a market capitalisation of over $100,000; and only 35 with over $1,000,000. Bitcoin is the
undisputed leader within this space, with a market capitalisation of over $6 billion, as of 15th
January
2016, which represents 90.79% of the total value of the cryptocurrency market.
The below table shows the top 35 currencies as per market capitalisation, as of 15th
January 2016:
Table 2 – Digital Currencies Ranking by Market Capitalisation (15th
January 2016)
N Name Symbol Market Cap (USD)
1 Bitcoin BTC $ 6,172,290,602
2 Ripple XRP $ 182,395,715
3 Litecoin LTC $ 148,018,279
4 Ethereum ETH $ 96,650,539
5 Dash DASH $ 22,212,121
6 Dogecoin DOGE $ 17,302,658
7 Emercoin EMC $ 11,659,505
8 Peercoin PPC $ 9,789,231
9 Factom FCT $ 8,724,205
10 Stellar XLM $ 8,573,634
11 BitShares BTS $ 8,034,591
12 Nxt NXT $ 7,883,747
13 MaidSafeCoin MAID $ 7,267,222
14 Bytecoin BCN $ 6,322,558
15 Namecoin NMC $ 5,791,110
16 YbCoin YBC $ 5,544,811
17 Monero XMR $ 4,988,864
18 NuShares NSR $ 3,041,879
19 GridCoin GRC $ 2,747,887
20 NEM XEM $ 2,674,782
21 BlackCoin BLK $ 1,980,187
22 Rubycoin RBY $ 1,869,985
23 MonaCoin MONA $ 1,855,987
24 Clams CLAM $ 1,587,096
25 Synereo AMP $ 1,512,263
26 Startcoin START $ 1,488,444
27 Tether USDT $ 1,451,600
28 Counterparty XCP $ 1,407,033
29 Bitcrystals BCY $ 1,401,043
30 VPNCoin VPN $ 1,310,396
31 BitcoinDark BTCD $ 1,148,222
32 Global Currency Reserve GCR $ 1,125,295
33 EarthCoin EAC $ 1,119,516
34 Novacoin NVC $ 1,096,830
35 MUSE MUSE $ 1,095,210
Source: CoinMarketCap.com
8
http://coinmarketcap.com/all/views/all/

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2.6 The Debate: Arguments for and against Bitcoin
Since its inception there has been much debate on the uses and acceptance of Bitcoin, yet there is no
consensus. On the side of those who support Bitcoin, the arguments range from low transaction costs
(Kim, 2015) to idiosyncratic elements tied to generational and trust aspects (Ali, 2014). On the side of
those who oppose, the arguments range from money laundering (Bryans, 2014) to price instability and
thus credibility over long term value (Yermack, 2014; Fama, 2015). Following Ali (2014), all of these
elements combined are the driver of the interest and willingness to adopt digital currencies such as
Bitcoin.
2.6.1 The arguments “for”
i. Low transaction costs
Bitcoin has been designed in such way that there is no need for a trusted third party by enabling
participants to transact with each other (Nakamoto, 2008). By removing the “middleman” the
transaction fees are reduced to those that can be added by the miners to each block in the block chain.
And it is precisely the block chain element that allows transaction costs to be low. Santander
InnoVentures, in collaboration with Oliver Wyman and Anthemis Group produced a report in 2015 on
Financial Technology (or FinTech) where they explored the opportunities that emerge from embracing
the recent developments such as the block chain, and how the implementation of these new technologies
can lead to savings of around USD 20 billion per year in the financial services industry. They mention
two main elements for this cost reduction: firstly, the operational system on a peer-to-peer basis
eliminates the costs associated with supervision and IT infrastructure; and secondly, the creation of an
accessible historical record enables effective monitoring and auditing by all participants, including
supervisors and regulators (Santander, 2015).
Furthermore, Ali (2014) argues that transaction costs are low because of a subsidy that the miners
receive in the form of new Bitcoins, which in addition to the competition amongst miners allows them
to accept transaction fees that are lower than the expected marginal cost of successfully verifying a
block of transactions. In fact, Ali argues that as per the design of Bitcoin, the marginal cost of verifying
a transaction in a decentralised system is higher than in a centralised one, and this is because of
economies of scale (2014).
ii. Idiosyncratic elements
Continuing with Ali (2014), ideological motivations underlie the foundations of Bitcoin and this is
largely due to the effects of the financial crisis of 2008, and the associated moral hazard on the overall
trust in traditional financial institutions. Institutional trust plays an important role in the stability and
maintenance of the social, political and economic system (Roth, 2009), and when economic crises

12
occur, economic institutions such as central banks and supra-national financial institutions (e.g. WB
and IMF) are amongst the first to lose the trust of the general public. Bitcoin seems to have been created
as a response of a lack of trust in central banking institutions, and it is a fact that the first block in
Bitcoin’s block chain includes the text (Ali, 2014):
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
The creation of Bitcoin took place in a time where trust levels in institutions were dropping, as it can
be perceived in Figure 1 below:
Figure 1: Net trust in the European Central Bank in the EA12 (EU27), 1999-2009 (Roth, 2009)
Source: Eurobarometer, Standard EB Nos. 51-71; quoted on Roth (2009)
But as it is mentioned by Roth (2009), and so agrees Schlichter (2014), the first impulse of the public
when financial crises occur is to ask for more state action, enhanced by an anti-globalisation sentiment.
However, advocates of Bitcoin such as Schlichter (2014) argue that a combination of a major financial
disaster and the readiness of Bitcoin as a sufficiently developed alternative could then turn markets to
a wider use and ultimately a collapse of the fiat system. Continuing with Schlichter, what he called the
“mainstream consensus” (2014) is one of the motivators of new developments such as Bitcoin, which
have been created as a response to an established belief, or intellectual common ground, where all
criticism is dismissed because it is seen as contrary to unchallengeable fundamental economic
principles. This mainstream consensus is a reference to he fiat system and how after the abandonment
of a monetary system with inelastic supply (i.e. the gold standard) governments and central banks have
achieved a higher degree of stability of the economic system as a whole.
iii. Economic arguments
The Austrian School of Economics (commonly referred as “Austrians” or “Austrian School”) holds that
business cycles are caused by governments’ intervention in the economies through changes in interest
rates. Šurda (2012) argues that Bitcoin adheres to the Austrian School of Economics in the sense that
its inelastic supply is, in essence, the tool to prevent credit contractions, or the “bust” phase of the

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business cycle. Developed by Mises in 1912 (quoted on Šurda, 2012), the Austrian Business Cycle
Theory can be summarised in two phases of expansion and contraction of credit called “boom” and
“bust”. The expansion phase (boom) happens as a result of the secondary money creation through
fractional reserve banking, whereas the contraction phase (bust) happens when changes in monetary
policy produce a reallocation of capital towards equilibrium, thus eliminating the monetary illusion of
growing nominal balances: a low interest rate environment enhances the boom and prolongs the bust.
According to Šurda (2012), mainstream economists view the boom phase as positive and the bust phase
as negative. As such, they advocate for policies to promote the boom and prevent the bust. On the
contrary, the Austrian School views the bust phase not as negative but as necessary, and suggests the
prevention of the boom phase if the economy operates under this paradigm. Schlichter also mentions
that fractional reserve banking is unlikely to develop in a Bitcoin-based system. Thus, a monetary
system based on Bitcoin rather than fiat money would be expected to have a complete inelastic money
supply (2012). Böhme et al (2015) agree with this statement when they mentioned that Bitcoin provides
absolute scarcity by definition.
2.6.2 The arguments “against”
i. Uses for financial crime: Money Laundering
As defined by the Financial Action Task Force (FATF), money laundering is the processing of criminal
proceeds to disguise their illegal origin (2015). There are three well-established phases in this process:
placement, layering and integration. The placement phase occurs when illegal funds are introduced into
the financial system. This might be done in a number of ways; the most common is splitting large
amounts of money into several smaller amounts that are deposited into one or more bank accounts to
be then reallocated. The second stage is then layering those funds, which consists in moving the funds
by, for example, converting into different currencies, or transferring to several other bank accounts. The
purpose is to distance the funds from the initial transaction or from the source. The third and final stage
is integration, and this consists in re-entering the funds back into the economy by way of purchasing
assets; typically real estate, luxury goods or even largely established businesses.
The main concern with Bitcoin in light of the anti-money laundering (AML) regimes is the anonymity
of users and of the network. In fact, even the name of the very creator of Bitcoin, Satoshi Nakamoto, is
a pseudonym. Authors such as Bryans (2014) argue that Bitcoin could enable criminals to move illicit
funds “faster, cheaper, and more discretely than ever before”. Also, because of Bitcoin’s decentralised
characteristic, stopping the Bitcoin network to prevent money laundering would require neutralising
every miner on the network, which makes it virtually impossible for AML enforcement agencies to act
(2014).

14
The FATF (2014) has also mentioned the money laundering risks present with Bitcoin and virtual
currencies in general, stressing three particular aspects: 1) non face-to-face relationships given the
online environment; 2) anonymous funding through virtual exchanges where the source of funds is not
identified; and 3) online wallets or “hot storage” which are vulnerable to hacking and theft by fraudsters.
However, the FATF recognises that there are legitimate uses for Bitcoin and virtual currencies in
general, primarily those linked to venture capital firms investing into start-up companies, as well as
micro-payments for goods and services that would have a more reduced market if the payments were
to be processed via the banking system due to the higher transactional costs.
The UK Government conducted a national risk assessment in October 2015, as part of its obligations
within the European Union’s IV Money Laundering Directive, where it has dedicated a chapter to
virtual currencies, including Bitcoin. The conclusion was that overall money laundering risk of virtual
currencies is low, since there are only a limited number of case studies in this matter, and thus any
conclusions would not be solidly supported (HMT, 2015). The UK Government shares the concern of
the FATF regarding the anonymity, speed of payments and global reach of Bitcoin and other virtual
currencies; however, there is also mention that these issues are similar to those identified in other
innovative payment solutions, such as e-money.
ii. Economic arguments
There are four main economic arguments against Bitcoin, as expressed by Yermack (2014), Glaser et
al (2014), Brezo and Bringas (2012, quoted on Glaser et al (2014)), Fama (2015), and Weber (2015):
a) high volatility, which leads to price instability and affects the long term value of Bitcoin; b)
preference for using Bitcoin as a speculative asset rather than as a currency; c) vulnerability to market
manipulation given the risks associated with the Bitcoin ecosystem; and d) absence of a lender of last
resort in the event of further financial crises.
a. Volatility
Volatility in finance is defined as the dispersion of the returns of an asset (in this case a currency), and
it is typically measured by using the standard deviation from its mean. For the purposes of this paper,
the calculations of volatility shall be discussed further on the methodology chapter. However, of the
many existing measures of volatility, the type of volatility to which reference can be made in the case
of Bitcoin is the ‘historical volatility’, which as the name suggests, is a price dispersion measurement
based on past data.
According to Fama (2015), the higher the volatility of a currency, the lesser a person would want to
hold it, either as a store of value, a unit of account, or for settling transactions. Thus, the question on
whether Bitcoin could survive in the future as a currency arises. In addition, following Hileman (2015),
Bitcoin cannot be considered a unit of account to the extent that there are no prices quoted in Bitcoin,
and if there are, these are rapidly changing as these are pegged to the US Dollar. Yermack (2014) argued

15
that Bitcoin’s volatility is significantly higher than that of widely used currencies, posing greater short-
term risks upon individuals holding it, and this characteristic undermines its usefulness as a unit of
account. Ali (2014) seems to agree when he mentions that digital currencies appear to be “poor short-
term stores of value” given their volatility.
The volatility of Bitcoin can be explained primarily by its liquidity, and its liquidity is also tied by both
the number of users and their purposes. The number of wallets as of September 2015 was 11,051,719
(CoinDesk, 2015), and according to Ali (2014), as of July 2014 the number of addresses listed on the
Block Chain was around 41 million, of which only 1.6 million contained a balance of more than 0.001
BTC, which at the prevailing exchange rate at that time, equalled about £0.35. Glaser et al (2014) also
found that media coverage is a significant driver for Bitcoin’s price volatility.
Dourado (2014)9
has analysed Bitcoin volatility by calculating the standard deviation over a moving
30-day window, finding that there is a statistically significant downward trend over time. These findings
were challenged by Sams (2014)10
, who argued that the trend is positive if volatility is calculated by
using the Mean Absolute Deviation, also on a moving 30-day window; and by Martin (2014)11
, who
argued that Dourado’s calculations cannot be supported given that the time-series is not stationary.
However, according to Dourado (2014), his objective was not to produce a volatility forecasting model,
for which Martin’s assumptions would be relevant, but rather to evidence whether historical volatility
of Bitcoin has reduced over time.
b. Bitcoin used as a speculative asset
Glaser et al (2014) mentioned that this high volatility makes Bitcoin more attractive to be used as a
speculative asset rather than as a currency. Ali (2014) also wrote that most Bitcoin users appear to be
holding them rather than using them for day-to-day transactions, however, this is affected by the fact
that the number of day-to-day service providers who accept Bitcoin as a currency or form of payment
is still relatively small. Yermack (2014) mentioned that Bitcoin’s price behaviour and volatility appears
to be more similar to that of a speculative investment similar to the Internet stocks of the 1990’s.
c. Vulnerability to market manipulation
The Bitcoin ecosystem consists of miners, wallets, storage services, exchanges, payment processors,
merchants, media, developers; and of course, end-users or consumers.
9
https://elidourado.com/blog/bitcoin-volatility/
10
http://cryptonomics.org/2014/01/22/is-bitcoin-volatility-really-in-decline/
11
http://www.separatinghyperplanes.com/2014/01/forecasting-bitcoin-volatility.html

16
The Bitcoin Ecosystem (CoinDesk, 2015)
Because there is no regulatory body that oversees the Bitcoin market, Bitcoin can be vulnerable to
speculation and mis-information (Brezo et al, 2012; quoted on Glaser et al, 2014). Bitcoin exchanges,
which allow transactions in digital currencies to be converted to traditional currencies, are not regulated
and thus are not subject to regulatory requirements such as systems and controls, governance, risk
management, conduct of business and capital adequacy. As such, Bitcoin exchanges have an inherent
and substantial default and conduct risk.
The most popular case in the literature is, perhaps, Mt. Gox, a Bitcoin exchange based in Tokyo, Japan.
In May 2013, US authorities seized the assets of Mt. Gox based on suspicions that the exchange was
engaging in the business of money transmission without an appropriate licence (Kien and Ly, 2014).
Mt. Gox filed for bankruptcy on February 28 2014, and a report from a Tokyo-based Bitcoin security
firm, WizSec, also published by CoinDesk, claims that Mt. Gox was “practically depleted of Bitcoins
by 2013”12
, and that it had been insolvent for years.
d. Absence of a lender of last resort
Acting as a lender of last resort is one of the primary functions and attributes of a central bank
(Domanski et al, 2014). This function is exercised in times of financial crises and in particular of credit
and liquidity crises. One good recent example of this is the ‘quantitative easing’ policies implemented
across the globe, but primarily in the United States, after the 2008 financial crisis. Because Bitcoin is a
decentralised system based on cryptographic proof rather than trust in a third party as an issuer (i.e. a
central bank), there is no individual or participant within the Bitcoin ecosystem that can act as such.
This means that under a scenario of an economy where all payments would be conducted in Bitcoin, as
opposed to a centrally issued currency, the central bank would lose the ability of monetary policy-
making, and thus, of influencing the real economy through conventional instruments of monetary policy
12
http://www.coindesk.com/most-mt-gox-bitcoins-were-gone-by-may-2013-report-claims/ . Full report: http://blog.wizsec.jp/2015/04/the-
missing-mtgox-bitcoins.html

17
(Ali, 2014), such as monetary stimulus. In the case of those economies with more state intervention,
this would remove the possibility of devaluating the currency as an instrument for equilibrating
government finances and the balance of payments.
2.7 Comments from the Financial Industry
In the context of the discussion about ‘boom and bust’ between Austrians and Monetarists, and also in
reference to the action of central banks, Axl Weber, chairman of UBS argued:
“...Private currencies will fail to take off because there is no lender of last resort. There will always
be boom and bust” (2015)13
.
Jamie Dimon, CEO of JP Morgan argues that Bitcoin is eventually going to be halted:
“Virtual currency, where it’s called a bitcoin vs. a U.S. dollar, that’s going to be stopped... No
government will ever support a virtual currency that goes around borders and doesn’t have the
same controls. It’s not going to happen.” (2015)14
.
Simon Smith, Chief Economist of FxPro focuses on the technology behind Bitcoin, rather than on
Bitcoin itself:
“Like all things, it grows in a way you would never expect... It’s going to be disruptive for the
payments industry and eventually, I think it’s going to be disruptive for currencies, but I think that
ultimately, you have to see it less as a currency and more as a technology” (2014)15
.
In a response from Citi’s Treasury and Trade Services to Her Majesty’s Treasury (HMT) in December
2014 regarding digital currencies, they have written:
“Due to the potential benefits, we believe that the adoption of Digital Money is inevitable. While
we believe that the use of Digital Money is certain, the future of specific crypto-currencies such as
Bitcoin is less clear... However, we believe that Governments and the Financial Industry
incumbents are not currently leveraging the benefits of emerging technologies and risk similar
challenges to that of the Post Office during the shift to digital forms of communication.”
13
http://www.cityam.com/228544/bitcoin-has-no-future-says-ubs-chairman-axel-weber-at-bank-of-englands-open-forum
14
http://fortune.com/2015/11/04/jamie-dimon-virtual-currency-bitcoin/
15
http://www.bloomberg.com/news/videos/2014-11-05/bitcoin-currency-commodity-or-technology

18
2.8 Legal debate
Since Bitcoin started gaining popularity in 2012, government agencies from several countries have
issued several statements in relation to how Bitcoin should be treated. The below list contains some of
the more relevant countries that have made such statements:
Table 3 – Legal treatment for Bitcoin
Country Treatment
United States  The US Internal Revenue Service (IRS) produced a guidance in 201416
which
stated that digital currencies are to be treated as property for US federal tax
purposes.
 On the other hand, the US Commodity Futures Trading Commission (CFTC)
confirmed in 2015 that Bitcoin and other digital currencies are covered by the
Commodity Exchange Act (CEA).
European Union  The European Union’s Court of Justice ruled that Bitcoin must be treated as
a currency for tax purposes. However, within the European Union there was
no consensus: On the one hand, the United Kingdom had already taken the
position of treating Bitcoin as a currency, whereas Germany aligns with the
treatment as a commodity.
Japan  There has been no statement from the Japanese government on Bitcoin as of
the date of this paper, however, it is expected to happen in early 201617
Canada  The Canada Revenue Agency have stated that Bitcoin should not be
characterised as money or currency, however, they have taken the approach
of consulting both the Senate and the Industry
Russia  A draft bill sent to the Russian Legislative Agency in December proposes a
ban of digital currencies domestically18
.
China  The Chinese government allows individuals to hold and trade Bitcoins
privately, but it prohibits financial institutions to participate and intermediate.
As it can be seen, no consensus from governments and their agencies has been reached. This is
important, as the legal aspect has an impact on the potential of usage that people can give to a currency
or asset.
A more interesting approach has come from Barbados, where two economists from the Central Bank of
Barbados issued a working paper recommending the inclusion of cryptocurrencies as part of the
portfolio of external assets held by a central bank (More and Stephen, 2015). However, the working
paper does not necessarily reflect the institution’s nor the government’s opinion on Bitcoin and other
digital currencies.
16
https://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance
17
http://www.newsbtc.com/2015/11/22/japanese-government-to-draft-regulatory-bill-for-bitcoin-by-early-2016/
18
http://www.coindesk.com/bill-bitcoin-ban-russian-legislature/

19
3. Hypothesis, Methodology and Data
3.1 Hypothesis
Bitcoin is a relatively new phenomenon, and because of its disruptive nature it creates significant room
for debate on both its definition and its implications. As it was evidenced from the literature review,
most authors who have argued caution about the feasibility of using Bitcoin as money or currency, have
done so by comparing it to widely-used currencies (Yermack, 2014) and referring to Bitcoin as a store
of value only in the short term (Ali, 2014). However, it is argued that Bitcoin might well gain popularity
and usage in emerging markets, given the volatility of these currencies and the type of macroeconomic
policies that are typically adopted to mitigate external shocks (i.e. currency devaluations to protect from
volatile prices in commodities – primarily, oil).
Thus, the main hypothesis is as follows:
𝐻0: Bitcoin volatility is more comparable to that of the currencies from emerging markets (as opposed
to the major currency pairs), hence it could be considered as a currency on its own.
Currencies from emerging markets are considerably more volatile than the major currencies. Literature
evidences that the higher liquidity and market depth for major currencies significantly reduces volatility
(Elliott, 2015). This leads to the second hypothesis:
𝐻02
: An increase in Bitcoin transactions has led to a decrease in volatility.
Testing these hypotheses would then allow the inference that should Bitcoin volatility continues to
decrease, it could be then considered as a currency in its own right.
3.2 Methodology
3.2.1 Definition of Volatility used:
As mentioned in the literature review section, volatility is a measure of the dispersion of the returns of
an asset from its mean. The definitions of volatility that are more commonly used are: 1) historical
volatility, 2) implied volatility, and 3) Beta. For the purposes of this paper the chosen definition was
the historical volatility, which is calculated by determining the average deviation from the average price
in a given period of time (Bloomberg, 2015). This methodology has been also applied by Dourado
(2014) for Bitcoin and is done by calculating the standard deviation under a moving 30-day and 60-day
window. The following steps were applied to calculate the standard deviation:
a. Given a time series of currency prices (close prices), the returns 𝑥𝑖 were calculated by taking
the Natural Logarithm:
𝑥𝑖 = ln (
𝑃1
𝑃0
) ; (1)

20
b. Once obtained the returns, the standard deviation was calculated for a moving 30-day and 60-
day window:
𝑠 = √
1
𝑛−1
∑ (𝑥𝑖 − 𝑚)2𝑛
𝑖=1 ; (2)
Where: 𝑥𝑖 = returns
𝑛 = number of returns
𝑚 = mean price
𝑠 = standard deviation
The principle behind using the standard deviation as a measure of volatility is that returns are assumed
to be distributed normally. This is indeed a strong assumption given that BTC returns and currency
returns are not normally distributed. However, it is used as an approximation.
Source: CoinDesk BPI (Bitcoin Price Index) with the candidate’s own calculations
Source: CoinDesk BPI (Bitcoin Price Index) with the candidate’s own calculations
Implied volatility is a measure of an asset’s expected volatility, calculated
-0.5 -0.4 -0.3 -0.2 -0.1 -0.05 -0.025 -0.01 0 0.01 0.025 0.05 0.1 0.2 0.3 0.4 0.5
BTC Historical Distribution of Returns
-0.5 -0.4 -0.3 -0.2 -0.1 -0.05 -0.025 -0.01 0 0.01 0.025 0.05 0.1 0.2 0.3 0.4 0.5
BTC Distribution of Returns (2015)

21
by taking the market price of the traded options for that asset (Bloomberg, 2015). Dourado (2014)
argues that this is a better measure for volatility, however, it cannot be applied in this case as the options
market for Bitcoin has not matured.
On the other hand, the classical Beta cannot be used as Bitcoin is not correlated with any of the widely
used currencies (Yermack, 2014), thus, market risk as measured by Beta does not have an effect on
BTC prices as of yet.
3.2.2 Emerging Market Currency Selection
The term “emerging market” was introduced by Antoine van Agtmael of the World Bank in 1980 (FT,
2006), referring to an economy with low-to-middle per capita income. Then Goldberg et al produced a
report called the Emerging Market Index (2008) to provide an insight into the main cities of these
emerging economies. The following countries resulted from that report:
 China
 India
 Indonesia
 Lebanon
 Malaysia
 Pakistan
 Philippines
 Thailand
 Vietnam
 Egypt
 Kenya
 Morocco
 Senegal
 South Africa
 Tunisia
 Bulgaria
 Hungary
 Poland
 Romania
 Russia
 Turkey
 Ukraine
 Mexico
 Dominican Republic
 Argentina
 Brazil
 Chile
 Colombia
 Ecuador
 Peru
 Uruguay
 Venezuela
Bloomberg provides a ranking of these currencies based on Historical Volatility, from which the top-5
currencies were selected:
Table 4 – Historical Volatility Ranking of Currencies (Base: USD)
Currency Symbol 1-month 2-month 6-month 1-year
Argentine Peso ARS 108.07 75.55 43.67 30.78
South African Rand ZAR 27.72 21.42 17.23 15.61
Colombian Peso COP 21.08 19.05 19.59 17.46
Russian Ruble RUB 20.87 18.37 22.03 26.24
Brazilian Real BRL 19.81 18.57 22.81 21.10
Indonesian Rupiah IDR 11.25 10.10 11.42 9.56
Turkish Lira TRY 11.01 11.29 12.22 13.07
Mexican Peso MXN 10.85 9.09 10.32 10.84
Hungarian Forint HUF 10.37 10.95 12.58 13.28
Polish Zloty PLN 9.66 10.20 10.53 12.66
Chilean Peso CLP 9.53 8.66 9.90 9.58
South Korean Won KRW 8.78 9.25 9.08 8.91
Romanian Leu RON 8.64 11.49 11.54 12.60

22
Malaysian Ringgit MYR 8.41 10.07 13.27 11.30
Bulgarian Lev BGN 7.90 10.85 11.18 12.19
Czech Koruna CZK 7.88 10.46 11.20 12.36
Taiwanese Dollar TWD 6.31 6.11 6.70 6.33
Singapore Dollar SGD 6.13 6.51 6.66 6.59
Indian Rupee INR 4.54 4.57 6.14 9.56
Philippine Peso PHP 4.44 4.42 4.84 4.47
Chinese Renminbi CNY 3.44 2.67 3.75 3.00
Thai Baht THB 3.43 3.98 5.53 4.91
Peruvian New Sol PEN 2.21 2.88 4.98 4.53
Hong Kong Dollar HKD 0.15 0.17 0.25 0.30
Source: Bloomberg
The Argentine Peso was discarded due to the distortions generated by the restrictions imposed by the
government in 2011 on the foreign currency market. The recently elected government of Argentina
lifted these restrictions on the 17th
December 201519
.
The following five currencies have been selected: South African Rand (ZAR), Colombian Peso (COP),
Russian Ruble (RUB), Brazilian Real (BRL) and Turkish Lira (TRY). The Turkish Lira was chosen
over the Indonesian Rupiah given that the former presented a higher volatility on a 2-month, 6-month
and 1-year basis.
This result is consistent with the elasticity of these economies to external shocks, such as energy prices
and geopolitical risk. In particular, the currencies and economies of Russia20
and Brazil21
have faced
difficulties throughout 2015 amid the drop in oil prices, whereas Colombia and Turkey have faced
increasing geopolitical risk.
3.3 Data
The data used on this study was the daily closing prices for BTC, ZAR, BRL, RUB, COP and TRY.
BTC prices were obtained from the CoinDesk Bitcoin Price Index22
, and the prices for the rest of the
currencies was obtained from the financial website Investing.com23
. Also from CoinDesk the data for
daily transactions in Bitcoin was obtained. It is worth mentioning that currencies are not traded on
exchanges, but ‘over the counter’ (OTC) and therefore there is no exchange determined market price as
such, in contrast to many equities. The period covered was from 18 July 2010 to 06 January 2016.
19
http://www.ft.com/cms/s/0/556d51b4-a447-11e5-873f-68411a84f346.html
20
http://www.bloomberg.com/news/articles/2015-01-14/ruble-falls-4th-day-on-oil-as-russia-concedes-junk-rating-likely
21
http://www.bloomberg.com/news/articles/2015-09-22/brazil-s-currency-tumbles-to-record-on-pessimism-over-budget
22
http://www.coindesk.com/price/
23
http://www.investing.com/quotes/single-currency-crosses

23
Source: CoinDesk
As a necessary comment to the price data, many researchers, such as Buchholz et al (2012) (quoted on
Glaser et al (2014)) have already concluded that Bitcoin has experienced the same behaviour as asset
bubbles. This has also been confirmed by Bitcoin enthusiasts such as Antonopoulos (2015), who said
that Bitcoin might continue to experience bubbles before it finds stability.
In order to show consistency with the dates, the calculations for the standard deviation ranged from 29
November 2011 to 05 January 2016, for a total of 1,071 data points. This ensured that the comparisons
were made using the same data points for each currency.
Source: CoinDesk with calculations made by the candidate
The data was then organised in two different periods: the first covers a 4-year period going from
30/11/2011 to 05/01/2016 for 1,070 data points, and the second covers the whole of the year 2015 from
01/01/2015 to 05/01/2016 for 264 data points. The purpose was to be able to show a closer look into
the recent past, always under the assumption that past performance is not necessarily an indicator of
future performance.
0
200
400
600
800
1000
1200
1400
18/07/2010
18/09/2010
18/11/2010
18/01/2011
18/03/2011
18/05/2011
18/07/2011
18/09/2011
18/11/2011
18/01/2012
18/03/2012
18/05/2012
18/07/2012
18/09/2012
18/11/2012
18/01/2013
18/03/2013
18/05/2013
18/07/2013
18/09/2013
18/11/2013
18/01/2014
18/03/2014
18/05/2014
18/07/2014
18/09/2014
18/11/2014
18/01/2015
18/03/2015
18/05/2015
18/07/2015
18/09/2015
18/11/2015
BTCUSD Closing Prices - Daily
Series from 18-07-2010 to 06-01-2016
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
19/07/2010
19/09/2010
19/11/2010
19/01/2011
19/03/2011
19/05/2011
19/07/2011
19/09/2011
19/11/2011
19/01/2012
19/03/2012
19/05/2012
19/07/2012
19/09/2012
19/11/2012
19/01/2013
19/03/2013
19/05/2013
19/07/2013
19/09/2013
19/11/2013
19/01/2014
19/03/2014
19/05/2014
19/07/2014
19/09/2014
19/11/2014
19/01/2015
19/03/2015
19/05/2015
19/07/2015
19/09/2015
19/11/2015
USDBTC Daily Returns

24
Source: Investing.com
6
8
10
12
14
16
18
18/07/2010 18/07/2011 18/07/2012 18/07/2013 18/07/2014 18/07/2015
USDZAR Closing Prices - Daily
Series from 18-07-2010 to 06-01-2016
1.5
2
2.5
3
3.5
4
4.5
18/07/2010 18/07/2011 18/07/2012 18/07/2013 18/07/2014 18/07/2015
USDBRL Closing Prices - Daily
Series from 18-07-2010 to 06-01-2016
25
35
45
55
65
75
85
18/07/2010 18/07/2011 18/07/2012 18/07/2013 18/07/2014 18/07/2015
USDRUB Closing Prices - Daily
Series from 18-07-2010 to 06-01-2016
1650
1850
2050
2250
2450
2650
2850
3050
3250
3450
18/07/2010 18/07/2011 18/07/2012 18/07/2013 18/07/2014 18/07/2015
USDCOP Closing Prices - Daily
Series from 18-07-2010 to 06-01-2016
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
18/07/2010 18/07/2011 18/07/2012 18/07/2013 18/07/2014 18/07/2015
USDTRY Closing Prices - Daily
Series from 18-07-2010 to 06-01-2016

25
4. Data Analysis and Findings
4.1 Change in Price
The first step in the analysis was to calculate the price change over a certain period. The period chosen
was such that a comparison was possible, in the sense that the first two-to-three years of Bitcoin there
was a relatively small number of transactions, and of relatively small size. When compared the
currencies in terms of price variation year-on-year, all currencies showed relative depreciation against
the US Dollar. This could be explained partly by the impact that the energy prices have had over these
economies, as well as political turmoil and geopolitical tensions. On the contrary, Bitcoin has
experienced a relative appreciation against the US Dollar, overperforming the emerging market
currencies:
Source: Investing.com with calculations made by the candidate
The Brazilian Real (BRL) was the currency that depreciated the most amongst the selected group,
having reached its weakest level against the US Dollar in September 2015. In fact, all five emerging
market currencies reached their weakest values against the US Dollar between September 2015 and
January 2016: both the South African Rand (ZAR) and the Russian Ruble (RUB) reached it in January
2016, the Turkish Lira in September 2015, and the Colombian Peso in December 2015.
The change in value of all these currencies has not meant, nor does it mean that their survival as money
is threatened; on the one hand because of the legal framework in these countries, which establishes the
currency as legal tender, and because of the central banks’ ability and willingness to intervene the
money markets, and thus affect the money supply as and when needed. In the case of Bitcoin, and
following the logic used with these emerging market currencies, its evolution towards becoming money
in its own right, or becoming obsolete does not seem to be tied to the change in its price, but rather to
the extent to which it may be used in the future, and whether it will be accepted as legal tender by any
government.
35%
-25%
-33%
-20%
-25%
-20%
Change in Price YoY 2014-2015 (%)
BTC ZAR BRL RUB COP TRY

26
4.2 Historical Volatility – 30-Day
Historical Volatility of BTC on a moving 30-day window has been reducing over time. This has been
already mentioned by Dourado (2014). However, BTC volatility remains significantly above the
volatility registered by the rest of the currencies evaluated. On the first part of the dataset, it seems clear
that the volatilities cannot be compared, as BTC volatility is significantly superior. This section of the
data, however, represents the initial stages of Bitcoin development and usage, as well as the problems
derived from the Mt. Gox episode. Whereas towards more recent periods, it has been found that there
have been times when BTC volatility has been lower than that of RUB, BRL and COP.
These findings can be better evidenced when looking at a narrower period, between 2014 and 2015:
The above chart evidences that BTC volatility on a moving 30-day window has been lower than RUB
volatility over three periods of time, and it has also been lower than BRL and COP volatility over two
and one periods of time, respectively. The below table shows those periods of time and the
corresponding spread, which is the difference between BTC volatility and the respective currencies’
volatility (a negative spread means that BTC volatility is lower than the respective currencies’).
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
30-Day Historical Volatility (4 Years)
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
30-Day Historical Volatility (2015)

27
It is worth mentioning the case of the Russian Ruble (RUB), given that Russia has been significantly
vulnerable to market turmoil amidst both the geopolitical crisis with Ukraine, the sanctions regime
implemented by the United States and the European Union, as well as the substantial drop in energy
prices.
Table 4 – BTC Volatility lower than RUB, BRL and COP Volatility (30-Day MW)
RUB From Spread To Spread Days
1 15/12/2014 -0.007736692 13/01/2015 -0.00160241 22
2 27/05/2015 -0.000473262 15/06/2015 -0.00454168 13
3 23/09/2015 -0.000205741 15/10/2015 -0.00234586 17
BRL From Spread To Spread Days
1 11/06/2012 -0.000434295 11/06/2012 -0.00043429 1
2 08/06/2015 -0.000302073 12/06/2015 -0.00093926 5
3 24/09/2015 -0.003799016 30/10/2015 -0.00435664 27
COP From Spread To Spread Days
1 24/09/2015 -0.001974788 14/10/2015 -0.00017627 15
4.3 Historical Volatility – 60-Day
The results for the moving 60-day window also show a decreasing trend in BTC volatility, but, as
expected, softened due to the increase in the size of N.
As it is the case with the moving 30-day window, analysing the first three years of BTC volatility against
the rest of the currencies would lack substance, given the limited usage, low price and volume of the
transactions, and subsequently the market bubble episode of Mt. Gox. In this sense, the 1-year chart
depicts a more appropriate outlook:
0
0.02
0.04
0.06
0.08
0.1
0.12
60-Day Historical Volatility (4 Years)

28
This time, BTC volatility was only lower than RUB and BRL, and for shorter periods of time:
Table 5 – BTC Volatility lower than RUB and BRL Volatility (60-Day MW)
RUB From Spread To Spread Days
1 29/12/2014 -0.00091 02/01/2015 -0.00243 5
2 12/01/2015 -0.00506 12/01/2015 -0.00506 1
3 15/06/2015 -0.00058 15/06/2015 -0.00058 1
3 22/06/2015 -0.00027 03/07/2015 -0.00021 10
3 26/10/2015 -0.00105 30/10/2015 -0.00063 5
BRL From Spread To Spread Days
1 23/10/2015 -0.00117 30/10/2015 -0.00152 6
Based on the above evidence, it can be said that Bitcoin volatility can in fact be compared to that of
emerging market currencies, when looking at the data between 2014 and 2015. However, there is not
sufficient evidence to conclude whether this is an exception. Hence, further tests on Bitcoin volatility
were conducted, in line with the second hypothesis.
4.4 Volatility decrease test
The test was conducted by running a simple OLS regression on the time-series for the standard deviation
with a moving 30-day window, with ‘DATE’ as independent variable, confirming the decrease in
volatility. The below results should not be interpreted as ‘time explains volatility’, but rather ‘volatility
has decreased over time’.
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
60-Day Historical Volatility (2015)

29
The results are consistent with Dourado (2014): Bitcoin volatility has been decreasing as standard
deviation over a moving 30-day window has been decreasing over time.
4.5 Transactions and the effect on volatility
The number of daily transactions in Bitcoin has experienced a rapid increase over time, as Bitcoin has
passed from being relatively unknown before 2012 to be relatively known in 2015.
The second hypothesis (null) was that this increase in transactions has explained part of the decrease in
volatility. To test this, a simple OLS regression was run, obtaining the following results:
The regression showed that the negative coefficient accompanying the transactions is significant at
95%. This would lead to not reject the null hypothesis. However, the R-squared reveals that there are
further factors in addition to transactions which explain volatility.
Dependent Variable: VOLATILITY
Method: Least Squares
Date: 01/14/16 Time: 13:36
Sample: 8/27/2010 1/11/2016
Included observations: 1402
Variable Coefficient Std. Error t-Statistic Prob.
C 0.601769 0.096874 6.211887 0.0000
DATE -8.07E-07 1.32E-07 -6.121848 0.0000
0
50,000
100,000
150,000
200,000
250,000
300,000
27/08/2010
27/10/2010
27/12/2010
27/02/2011
27/04/2011
27/06/2011
27/08/2011
27/10/2011
27/12/2011
27/02/2012
27/04/2012
27/06/2012
27/08/2012
27/10/2012
27/12/2012
27/02/2013
27/04/2013
27/06/2013
27/08/2013
27/10/2013
27/12/2013
27/02/2014
27/04/2014
27/06/2014
27/08/2014
27/10/2014
27/12/2014
27/02/2015
27/04/2015
27/06/2015
27/08/2015
27/10/2015
27/12/2015
Daily Transactions in Bitcoin
Dependent Variable: LOG(VOLATILITY)
Date: 01/14/16 Time: 13:42
Sample: 8/27/2010 1/11/2016
C -4.688696 0.049636 -94.46097 0.0000
LOG(TRANSACTIONS... -0.009698 0.004832 -2.006961 0.0449
R-squared 0.002869 Mean dependent var -4.787073
Adjusted R-squared 0.002157 S.D. dependent var 0.292689
S.E. of regression 0.292373 Akaike info criterion 0.379851
Sum squared resid 119.6746 Schwarz criterion 0.387335
Log likelihood -264.2758 Hannan-Quinn criter. 0.382649
F-statistic 4.027893 Durbin-Watson stat 0.022804
Prob(F-statistic) 0.044946

30
In order to determine whether this result is influenced by the trend of the transactions, another regression
was done:
This time, the results changed in favour of the rejection of the null hypothesis as the trend seems to
explain the decrease in volatility, whereas the transactions seem to have had the opposite effect. On the
contrary, this could mean that transactions are increasing as a result of an increase in volatility:
This result would be consistent with Glaser et al (2014): Bitcoin users are speculating with it as opposed
to holding it as store of value, or for day-to-day transactions. In this sense, should volatility continue to
decrease over time, then speculators would likely move from Bitcoin to more volatile assets, thus
allowing Bitcoin to gain attractiveness for day-to-day transactions, as happens with traditional
currencies.
Dependent Variable: LVOLATILITY
Date: 01/14/16 Time: 14:11
Sample: 8/27/2010 1/11/2016
C -5.317907 0.087250 -60.95048 0.0000
LTRANS 0.079331 0.011302 7.019227 0.0000
@TREND -0.000391 4.51E-05 -8.665347 0.0000
R-squared 0.053661 Mean dependent var -4.787073
Dependent Variable: LTRANS
Date: 01/15/16 Time: 20:02
Sample: 1 1402
C 9.623513 0.290211 33.16036 0.0000
LVOLATILITY 0.428831 0.061094 7.019227 0.0000
@TREND 0.003674 4.42E-05 83.18065 0.0000
R-squared 0.832293 Mean dependent var 10.14415

31
5. Conclusions
This paper aimed to compare Bitcoin’s volatility against the volatility of currencies from emerging
markets, as an argument to support the thesis of Bitcoin as a currency. It was found that Bitcoin volatility
has been lower than that of the Russian Ruble, the Brazilian Real and the Colombian Peso during several
periods in 2015; however, Bitcoin volatility remains significantly higher. It was also found that the
increase in the number of transactions does not seem to explain the decrease of volatility over time, but
rather the opposite: volatility seems to explain the increase in transactions. The paper also covered the
definition of money in accordance with the economic theory, with the purpose of assessing Bitcoin as
a store of value, medium of exchange and unit of account. The legal support seems to play a major role
in the acceptance of Bitcoin by the wider public, and in this aspect there is no consensus. Where there
is consensus is on the fact that although it has the potential to become a global currency, Bitcoin
volatility undermines its ability to be used as a currency, other than for speculative purposes, and this
is partly due to the fact that all prices shown in Bitcoin are pegged to a fiat currency, which makes it
seen as an asset within a portfolio, rather than a currency as such.

32
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