"It's tempting for some people to overstate the power of bitcoin," says Dr Adrian Lee, who with fellow researchers made a submission to the inquiry. Dr Lee is a member of the finance discipline group in the Business School at the University of Technology Sydney (UTS). "But the entire pool of bitcoin is worth about $US10 billion [$14 billion], compared to the trillions of US dollars in existence. It's still in its infancy." Bitcoin is a payment system invented in 2008 to allow peer-to-peer transactions – transactions between two people without a third party such as a bank being involved. Bitcoin does not exist as coins or notes but as "virtual" money. As a currency, however, bitcoin has become known for big moves in value and that has attracted speculators hoping to capture big returns by buying bitcoin at a low point and selling it high. In the two-year period studied by Dr Lee and researchers Associate Professor Dirk Baur and Dr Jimmy Hong, the value of a bitcoin rose from $5.28 to $388.55. But it wasn't a straight line. In that period it soared and dived – at one point reaching $1150 only to halve in value to $547 three weeks later.

Dr Lee and his researchers have been looking at whether bitcoin is a currency or a commodity, in a project sponsored by the SWIFT Institute, an international group that supports research into financial services. Why does the difference matter? Because if bitcoin is mainly used as a currency to pay for goods and services it's a competitor to fiat or "real" currencies such as the US dollar. This means it could influence currency values and, ultimately, monetary policy in countries such as Australia. That makes it of interest to the Reserve Bank. If, on the other hand, it's mainly used as an investment, it is competing with assets such as government bonds, shares and commodities, including gold. That means investment regulators such as the Australian Securities and Investments Commission (ASIC) will want to keep an eye on it. Dr Lee and his researchers found that even though it was designed as a payment system, bitcoin appears to be used mainly as an investment. Examining transaction data from the public ledger on which the bitcoin network relies, the researchers estimated that "currency users" accounted for a small minority of bitcoin transactions – about 2.5 per cent. Those users keep very small balances.

In contrast, about a third of all available bitcoins are held by investors. "There are very few users that use bitcoin purely as a medium of exchange, and the biggest group of users use it purely for investment," Dr Lee says. The average transaction of a "currency user" is $130, compared to more than $18,000 for an "active investor" in bitcoin, according to the research. Whichever way bitcoin is used, says Miles Larbey, senior executive leader for financial literacy at ASIC's MoneySmart, people should remember that the exchange platforms on which you buy and sell virtual currencies are generally not regulated, which means that if the platform fails or is hacked you are not protected and have no statutory recourse. "Just as your real wallet can be stolen by a thief, the contents of your digital wallet can be stolen by a computer hacker," Larbey says. "You also have no protection against unauthorised or incorrect debits from your digital wallet." Consumer concerns aside, Dr Lee says that because the size of bitcoin investments and transactions is relatively small, the researchers don't see an immediate risk to overall financial or monetary stability.

"But if the acceptance of bitcoin or similar 'virtual' currencies increased significantly, on a global scale, that could change," he says. "And, given bitcoin's global nature, and its independence from any central bank or multinational authority, regulatory oversight might be a challenge. "Central banks and other regulators would be well advised to carefully monitor developments of bitcoin and other virtual currencies." Stories written and produced by the University of Technology, Sydney, for Brink, a publication distributed monthly in The Sydney Morning Herald.