The cryptocurrencies and the Bitcoin in particular, being the most prominent among them, are not likely to crowd out fiat currencies or have a significant impact on the existing monetary policies and financial stability. Furthermore, the design of the cryptocurrencies and the behavior of the cryptocurrency community, deprives them from its intended use as a medium of exchange.
Those are some of the conclusions of a scientific research paper prepared of the SWIFT Institute, called “Virtual currencies: Media of exchange or speculative assets?”, based on a research done by Dirk G. Baur, UWA Business School, KiHoon Hong, Hongik University College of Business in South Korea and Adrian D. Lee, University of Technology Sydney (Australia).
The report notes that Gresham’s law (“bad money” drives out “good”) cannot be applied to cryptocurrencies, as their value is generally not fixed to a fiat currency. A possible solution would be fixing their value and then Gresham’s law could be applied and the bitcoins (“bad money”) could potentially drive out the “regular” currencies (“good money”). “However, whilst a fixed price may solve one major problem it would not be consistent with the decentralized, libertarian and free-market designs of most virtual currencies,” the SWIFT Institute report says.
Another reason why the cryptocurrencies are no real threat to the existing monetary stability, outlined in the report, is that they are more of a speculative asset, rather than a payment instrument. The study found that about one third of the existing Bitcoins are being held by investors who only receive/buy Bitcoins, but do not send/sell them. On the other hand, only a small minority, both in numbers and in volume of the transactions, is using the Bitcoins as a medium of exchange, hence the cryptocurrency is more often than not used for investment purposes.
Further, the volume both of investments and transactions in Bitcoin is relatively small, compared to the overall volumes of fiat currencies and other assets, they cannot pose a real threat neither to the monetary stability, nor to the “traditional” currencies.