The growing popularity of Bitcoins as an alternative currency has fueled the industry’s imagination for a related exchange traded fund. However, a new economic study contends that the crypto-currency could be more of a speculative play.
According to David Yermack of the Stern School of Business at New York University, the Bitcoin “does not behave like a currency at all” and shows similar traits to some Internet stocks that collapsed in the 90s, reports Simon Kennedy for Bloomberg.
Yermack compared the Bitcoin against other major sovereign currencies based on medium of exchange, a unit of account and store of value. The crypto-currency serves as a medium of exchange as more places accept the money, but the currency fails as a unit of account and store of value.
The digital currency is volatile and its exchange rate with the U.S. dollar “has virtually zero correlation” with how the dollar trades against other currencies, Yermack argued, making the currency’s “risk nearly impossible to hedge for businesses and customers and renders it more or less useless as a tool for risk management.”
The Bitcoin currency surged above $1,200 earlier this year but currently resides below $700.
The Bitcoin is a type of decentralized digital currency based on a peer-to-peer network and can be exchanged through computers internationally without a financial intermediary. The system was first introduced by developer Satoshi Nakamoto in 2009.
Complex computers act as “miners” that would confirm transactions between two parties using Bitcoins, and they would receive Bitcoins as compensation. This helps serve to expand the supply of Bitcoins, which can not exceed 21 million. [As Bitcoin Inches Toward Legitimacy, ETF may Soon Follow]
As the digital currency gains momentum, some have floated the idea of an ETF backed by Bitcoins. Earlier this year, the Winklevoss twins of Facebook (NasdaqGM: FB) fame, filed plans with the Securities and Exchange Commission for the Winklevoss Bitcoin Trust. At the time, the filing did not include a ticker, expense ratio or possible release date, indicating that a launch date was not imminent. [Winklevoss Bitcoin ETF: Crazy, or Crazy Like a Fox?]
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