Top economist who called Bitcoin a bubble says it’s a medium of exchange

Three of the world’s top economists — including one that previously called Bitcoin a bubble — have produced a study countering the persistent narrative that the cryptocurrency is purely speculative.

World Bank Chief Economist Carmen Reinhart, alongside World Bank economist Clemens Graf von Luckner, and Harvard economics professor Kenneth Rogoff — recently published their findings in the National Bureau of Economic Research (NBER).

According to the 35-page paper, the trio determined that Bitcoin is a “vehicle currency” for international transactions, especially in countries under economic sanctions.

They studied data spanning four years and $11 billion worth of off-chain transactions processed by peer-to-peer (P2P) Bitcoin marketplace LocalBitcoins.

The data comprised around 45 million Bitcoin transactions featuring 135 various fiat currencies.

“Of course, there is substantial anecdotal evidence on the use of crypto for transactions purposes, and it is well known that Bitcoin is the medium of choice on the [dark web], not to mention ransomware,” said the researchers.

“But systematic analysis has been lacking to support that claim. Our methodology allows us to systematically establish a lower bound on the use of Bitcoin as a medium of exchange. It is quantitative, rather than anecdotal.”

7% proves Bitcoin has uses beyond speculation

Reinhart, Rogoff, and Graf von Luckner developed an algorithm to differentiate types of Bitcoin transactions.

The economists used the algorithm to identify whether Bitcoin was bought as an investment, or if it was used to facilitate a “crypto vehicle transaction.”

A “crypto vehicle transaction” was defined as those in which Bitcoin moved “capital across borders or [facilitated] domestic transactions.”

After tracing BTC amounts down to the satoshi (the smallest Bitcoin unit) and timestamps to the second, the algorithm matched trades with 95% confidence.

• 7.4% were “crypto vehicle transactions”
• 20% of those were international moves between fiat currencies.
• Russia and China performed the most same-currency trades.

Although only 7.4% were identified as crypto vehicle transactions, the economists suggest this is enough to disprove the idea that Bitcoin is purely a speculative asset — a claim often leveraged by those who say it’s a bubble.

“A critical question is the extent to which there is an underlying transactions demand, now or in the future, to justify [Btitcoin’s] high if wildly fluctuating prices.”

“The results of this paper provide perhaps the strongest quantitative evidence to date demonstrating that, the use of Bitcoin for both domestic and international payments has been significant worldwide,” wrote Reinhart, Rogoff, and Graf von Luckner.

Nearly 90% of Bitcoin bought with rubles ended up back in the original currency. Similarly, 84% of all trades involving the yuan returned to its fiat of origin.

Russia’s high figure is likely due to attempts to evade US economic sanctions, noted the economists. They highlighted desire to keep transactions hidden from the Kremlin.

In terms of cross-border trades, the top 10 has two currency pairs: US dollars to Nigerian naira, and Colombian pesos to Venezuelan bolivars.

The authors suggest other applications for their algorithm, like regulatory research into stablecoin transactions.

Rogoff once claimed Bitcoin was a bubble

The paper’s findings appear to challenge earlier comments from one of its authors.

In January, Rogoff told Bloomberg that he’s a Bitcoin skeptic, and claimed there isn’t any reasonable use for it.

“What’s the use? Is it just value because people think it’s valuable? That is a bubble that will blow up,” said Rogoff.

Rogoff, who also serves on the G30 working group, believed cryptocurrency isn’t likely to survive government regulation, but thought some stablecoins may survive.

[Read more: Iran lifts Bitcoin mining ban in face of power shortages, US sanctions]

In any case, Reinhart, Rogoff, and Graf von Luckner stopped short of offering expert advice to policymakers.

They did suggest Bitcoin transactions should not be ignored.

“We do not comment here on the future of Bitcoin regulation,” they wrote.

“But one can certainly infer from these results that any country aiming to institute or maintain capital controls will also need to find a way to prevent these from being circumvented via crypto.”

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