Bitcoin and the Demand for Money: Is Bitcoin More Than a Speculative Asset?

Abstract

Is bitcoin money? We study the characteristics of bitcoin, following the theory of money demand first posited by Keynes (1935). Specifically, we answer three questions. First, is bitcoin used as a transactional currency? Yes. Second, is bitcoin used as a speculative currency? Yes. Third, is bitcoin used in a precautionary sense? Yes, although there are mixed results in support of this motive. We find this evidence using data on bitcoin returns and volume from 2010-2017, using a principal components analysis framework, supplemented with tests that incorporate specific elements of each component, as well as some recent international events.