Price Stability of Cryptocurrencies as a Medium of Exchange

TL;DR

This paper provides evidence that major cryptocurrencies like Bitcoin, Ethereum, and Ripple have exhibited price stability relative to traditional financial assets from 2016 to 2020, supporting their potential as a medium of exchange.

Contribution

It introduces a comprehensive analysis of cryptocurrency price stability using multiple measures and confirms their stable relation with traditional assets over several years.

Findings

Cryptocurrencies show increased correlation with traditional assets over time.

Daily return similarities between cryptocurrencies and major financial assets have persisted since 2016.

Price prediction errors align with the Black-Scholes model, supporting market efficiency.

Abstract

We present positive evidence of price stability of cryptocurrencies as a medium of exchange. For the sample years from 2016 to 2020, the prices of major cryptocurrencies are found to be stable, relative to major financial assets. Specifically, after filtering out the less-than-one-month cycles, we investigate the daily returns in US dollars of the major cryptocurrencies (i.e., Bitcoin, Ethereum, and Ripple) as well as their comparators (i.e., major legal tenders, the Euro and Japanese yen, and the major stock indexes, S&P 500 and MSCI World Index). We examine the stability of the filtered daily returns using three different measures. First, the Pearson correlations increased in later years in our sample. Second, based on the dynamic time-warping method that allows lags and leads in relations, the similarities in the daily returns of cryptocurrencies with their comparators have been present even since 2016. Third, we check whether the cumulative sum of errors to predict cryptocurrency prices, assuming stable relations with comparators' daily returns, does not exceeds the bounds implied by the Black-Scholes model. This test, in other words, does not reject the efficient market hypothesis.