Bank of Canada paper: The more people accept Bitcoin, the less volatile its price will be (full paper download)

The Bank of Canada has released a new working paper in which researchers believe the volatility of exchange rates for digital currencies, such as Bitcoin, will decrease as adoption of digital currencies increases.

The paper was co-authored by Wilko Bolt, a researcher at the Dutch Central Bank, and Maarten RC van Oordt, a researcher at the Canadian Financial Stability Department. The paper provides a possible "economic framework" for analyzing the exchange rate of digital currency transactions. It is reported that the paper was published on August 18 and it represents the latest digital currency research work of a major central bank.

The authors of the paper explore factors that influence the exchange rates of digital currency transactions, including existing demand for payments, the activities of market speculators, and the belief of some buyers in the future mainstream adoption of digital currencies.

Ultimately, they concluded that price volatility could subside if digital currencies gained wider payment adoption.

The authors note:

“Our model predicts that as a cryptocurrency becomes more mature, speculator inflows and outflows will become less sensitive to the impact of exchange rates. This prediction contradicts the current view that high volatility of cryptocurrencies will prevent their widespread adoption.”

At the end of the paper, the researchers also asserted that digital currencies with a "fixed supply" behave more like commodities than currencies, and that current trading rates are potential "early signs of development" that will evolve depending on how the digital currency is used.

“The future will show reduced levels of volatility,” they concluded.

Research continues

In the past two years, the Bank of Canada has made several comments on the topic of digital currency, and has been actively exploring blockchain applications. This paper represents new progress in the Bank of Canada's research on digital currency technology.

Earlier this summer, the Bank of Canada made headlines when it announced a pilot project for a central bank digital currency. In November last year, a senior Bank of Canada official gave a speech saying that Bitcoin could lead to "a new driving force in the global monetary order" as major central banks are actively pursuing digital currency policy initiatives.