Anonymity or speculation? Risks and sources of legitimacy for virtual currencies

Is Bitcoin mainly a speculative instrument or a tool for protecting the anonymity? This paper investigates virtual currencies with a double aim: first to identify and analyze the individual and organizational risks associated with the their increasing diffusion; second to understand if they can be interpreted as instruments for anonymity or instruments for speculation. The research follows a mixed method approach: qualitative and anecdotal evidences are analyzed to identify the risks in the diffusion of virtual currencies, whereas a quantitative analysis is performed to investigate if Bitcoin is mainly an instrument to support anonymity or to foster speculation by measuring risk-adjusted performance and volatility. The empirical findings will show that in a first phase Bitcoin’s risk-adjusted performance, and especially volatility, are much higher than for any other financial instrument (even the more speculative ones), thus suggesting the prevalence of anonymity as a driver of their diffusion. In a second phase, Bitcoin’s riskadjusted performance becomes similar to the one of speculative investments (hedge funds and private equity) rather than traditional currencies thus suggesting the prevalence of speculation as a driver of their diffusion. Interpreting these findings we are also able to draw organizational conclusions about the evolution of Bitcoin and its (distributed) source of legitimacy.