Bitcoin – a currency or an asset?

Abstract

Cryptocurrencies is a part of the fast growing fintech market. Bitcoin is the first cryptocurrency, but also the currency with the largest market share. Bitcoin was created in 2009, by Satoshi Nakamoto, and have in the years since its release faced very volatile exchange rates. The purpose of Bitcoin is to create a currency that allows payments to be sent from one party to another without going through a financial institution. The volatile exchange rate, and Bitcoins attributes has raised the question of how to define Bitcoin. This thesis answers the research question: Bitcoin – a Currency or an Asset? The thesis defines what is fiat currency, monetary theory and monetary value, in addition to the asset classes capital assets, consumable/transferable asset and store of value assets. Bitcoin’s attributes are discussed in light of these definitions. Also included in the background are the governmental views on Bitcoin. Here the thesis focuses on how cryptocurrency is handled by legislators. In Japan cryptocurrencies are deemed legal tender, in the E.U. it is defined as currency, in the U.S. Bitcoin is defined as a commodity, while other cryptocurrencies is defined as securities, in China government has issued a ban on all cryptocurrency. The empirical part of this thesis is made up by time series regressions and rolling window regression using Bitcoin exchange rates, price of gold, OFRS financial stress index, S&P 500 and the federal funds rate as parameters. Bitcoin is designed to function as a currency, but lack of acceptance in the economy causes problems for the users. The volatile exchange rate also causes problems as it makes Bitcoin worthless as a measurement of value, and also difficult to use Bitcoin for consumption. Findings from the time series regressions and the rolling window regressions indicate that the Bitcoin’s exchange rate follows the asset market. When the S&P 500 increases and the OFR financial stress index is negative, indicating low stress in the financial market, the Bitcoin exchange rate increases. The exchange rate is also positively correlated with the price of gold. The empirical evidence, together with the theoretical framework leads to the conclusion that Bitcoin is an asset.