There is a newly published academic paper on the National Bureau of Economic Research website titled “Decrypting New Age Capital Flows” that has not yet gotten much attention but really should. Why?
- Two of its authors are Carmen Reinhart and Ken Rogoff. The former is the Chief Economist at the World Bank, among other duties. The latter is a tenured professor in Economics at Harvard. The third author (but listed first on the article) is Clemens Graf von Luckner, an economist and data scientist at the World Bank.
- It analyzes in a very clever and novel way exactly where and how bitcoin is used as a real currency rather than just a speculative asset.
Now, you may recall that Reinhart and Rogoff got into a bit of an academic kerfuffle about a decade ago, so let’s get that out of the way before proceeding. Their 2010 paper “Growth in a Time of Debt” was influential in convincing policymakers that excess public debt would hurt the economic recovery after the Great Recession. Subsequent analysis on the data they used to come to that conclusion (not released when the paper was published) found coding errors in their spreadsheets, among other problems.
We don’t think it matters to the paper we’re discussing today, however. First, the data they use (from the world’s largest peer-to-peer bitcoin exchange) is available for anyone to analyze and their methodology is simple. Second, the lead author is a data scientist whose name does not start with “R”.
With that out of the way, here is the research described in the paper and what its authors think it shows:
- Using data from a peer-to-peer virtual currency service called LocalBitcoins.com, which is available in 135 countries, the researchers looked at transfers between users that were clearly transactional in nature. Bitcoin’s volatility and 8 decimal granularity makes finding those fairly straightforward.
- An example from the paper: if a US dollar-based user transfers 0.01157996 bitcoin at 2:42pm and a Venezuelan bolivar-based user sells exactly the same (down to the 8th decimal place) amount of bitcoin at 3:28 pm on the same day, that pairing has a very high likelihood of being a real economic transfer of value.
- Examining +45 million transfers made in between March 2017 and July 2021, the researchers found that at least 7.4 percent of all bitcoin transactions were likely “real world” payments (i.e., not speculation) and 17 pct of those were cross-border transfers.
As for which fiat currencies were on either side of a bitcoin transaction, the authors found these results, which show both same-country transfers (e.g., Russia, Venezuela, China) as well as remittance-driven flows (US to Nigeria, Columbia to Venezuela):
There is a lot more data and details in the paper (link below), but to keep things moving we’ll summarize the authors’ conclusions:
- “The results of this paper challenge the dominant view that bitcoin is little used for transaction purposes (other than buying other [virtual] currencies), and that its value is almost entirely based on speculation.”
- Natural experiments like the impact of Venezuela’s 3-day power outage in 2019 on transaction volumes in bitcoin point suggest that 7.4 percent of all transactions in the virtual currency are real-world transfers is “very much a lower bound” (i.e., the real percentage may be much higher).
- “If there are controls on [virtual currencies], these need to be included in any “new age” measures on international capital movements.”
To wrap up, we have 2 thoughts on this paper and its findings:
First, the work here shows real people use bitcoin for real economic reasons. Yes, governments may take issue with some of those reasons. But, even with bitcoin’s notorious volatility and occasionally sketchy wallet security, it still has utility in many parts of the world. That’s something we often find US/European citizens don’t always entirely understand. If you are a Venezuelan working in Columbia to help support your family in Caracas, bitcoin may be your best bet as a cross-border medium of exchange.
Second, global policymakers clearly have their work cut out for them to catch up to how virtual currencies are already reshaping the nature of “money”. There’s only 2 ways to do that. One is to ban them, as China for example is trying to do. That’s a good near-term answer if policymakers want to limit the threat of monetary instability, but it leaves the country out in the cold if the rest of the world continues to adopt them. The other approach is to push for transnational regulation, which is what the NBER paper suggests, but that comes with its own challenges.
Bottom line: we find it remarkable that two well established economists, and one with a major role at an institution like the World Bank, have come out and said bitcoin isn’t just a tulip bulb-like mania. Based on the data presented, they could have just as easily concluded that +90 percent of transactions were speculative. They did not. That tells us they know virtual currencies are here to stay.