Bank of Canada paper: widespread usage of Bitcoin could decrease its volatility

Bank of Canada recently published a research paper "On the Value of Virtual Currency". This paper develops a theoretical framework to analyze the economic factors affecting the exchange rates for virtual currencies, such as Bitcoin.



Theoretical framework, presented in this research, shows that three components are important for the exchange rate. First, the current use of virtual currency to make actual payments. Second, the decision of forward-looking investors to buy virtual currency (thereby effectively regulating its supply). Third, the elements that jointly drive future consumer adoption and merchant acceptance of virtual currency. On the consumer side of the market, private benefits may be large for those who frequently execute cross-border payments, such as remittances.



Additionally, consumers who value privacy and anonymity more, and those who are technologically more adept are likely to gain from using virtual currencies. On the other side of the market, large merchants may experience considerable private benefits from avoiding the high fees charged by traditional payment providers. Internet stores may gain as well, since they face relatively low implementation costs when accepting virtual currencies.



The model predicts that, as virtual currency becomes more established, the exchange rate will become less sensitive to the impact of shocks to speculators’ beliefs and their inflow

into and outflow from the virtual currency market. This prediction undermines the notion that the current high volatility of the exchange rates of virtual currencies will prohibit their widespread usage in the long run.