Crypto Currency News

Trending News

Bitcoin
$69,856.17
-700.88
Ethereum
$3,525.66
-49.25
Litecoin
$93.71
-2.41
DigitalCash
$38.15
-0.66
Monero
$135.61
-2.33
Nxt
$0.00
-0
Ethereum Classic
$31.94
-0.44
Dogecoin
$0.21
+0.01

So, you STILL think Bitcoin is money?

Why cryptocurrencies are not currencies or the world’s new money

Background

For longer that I’d like to admit, I’ve built expertise within banking and retail payments infrastructure. Being highly curious about all matters digital, especially within my profession, I’ve added distributed ledger technology, blockchain, tokenization, cryptocurrencies, as well as central bank digital currencies to my areas of subject matter expertise.

So, now that every Tom, Dick, Harry, and sadly, El Salvador, have gotten into cryptocurrencies, and Gucci as well as both Mastercard and Visa enable real-life spending of these, I thought it important to add serious food for thought to those that have, or consider, engaging in the cryptocurrency space.

What is money?

Let’s start with what money actually are: Money is a generally accepted, recognized, and centralized medium of exchange in an economy, used to facilitate transactional trade for goods and services. At the core, and above all, is trust in value of such money – as well as the financial eco-system as a whole. Providing that trust is the role of central banks. They do this, by ensuring stable prices and low inflation, financial stability, as well as provide safe and efficient payments including issuing so-called Fiat money.

Over time, and for practical reasons, states and governments have enabled the private sector to play a key role in the financial eco-system and today, we have collectively come to entrust commercial banks with our money. Through a vast, regulatory framework, we consider our bank account as a secure storage of our money. We accept and agree that instead of central bank issued cash, we may pay each other via various payment initiation methods such as online bank, cheque, credit and debit cards, Apple Pay, Google Pay, Swish, Twint, Venmo, Vipps, MobilePay, Etc.

[Some of] the trouble with cryptocurrency

Bitcoin might have been envisioned as “A Peer-to-Peer Electronic Cash System” by yet-to-be-identified Satoshi Nakamoto. But the actual use of what we think of as “Bitcoins”, is far from a means of payment, let alone a form of money. Bitcoin and most other cryptocurrencies fail on several of the agreed characteristics of money:

  • Let’s start with the obvious: they are not stable in value. Most narrative centers around their highly volatile value (usually compared to the US Dollar). Between September 2020 and October 2021, Bitcoin doubled in purchasing power every 5 months meaning that every 5 months you could halve the Bitcoins needed to buy an item (or the same Bitcoin could get you twice as much of the same). Were Bitcoin money, this would have been a rare example of deflation, where delaying purchasing something, will get you more of that something tomorrow. Hence, cryptocurrencies are mostly bought as a speculative investment where onesupposedly should HODL. At the time of writing, this, however, seems to have been a bad strategy.
  • They are not a generally accepted, recognized, and centralized medium of exchange of value (payment). According to Chainalysis’ CEO, in 2021 a mere 2% of cryptocurrency traffic were actual payments. A recent Coinbase survey, claims that 33% of UK consumers have purchased cryptocurrency. This suggests that most UK consumers have flocked to cryptocurrencies out of FOMO and the hope of getting rich…. According to Chainalysis, upwards of 10% of the GDP of North Korea, are from stolen crypto assets, mostly Bitcoin or Ether which are easily traded. Basically, these crypto assets are either outright stolen from exchanges or they are paid as part of ransomware attacks.
  • Low throughput. Due to inherent inefficiencies of certain blockchain based cryptocurrencies, they are not able to cater to the volume of transactions, or the throughput, that would be required of a generally used means of payment. The Bitcoin blockchain only supports 4.6 transactions per second compared to the Visa network’s 1,700! Ethereum, however, is planning to allow upwards of 100,000 transactions per second before 2023 (up from today’s 30).
  • Lack of regulation. All societies depend on monetary regulation to ensure that all play by the same rules, including taxation to ensure common, beneficial services such as infrastructure, social services, military, police, education, governmental services, etc. etc. Cryptocurrencies would need to be regulated as today’s financial sector, but then by whom?

Stable coins are a version of cryptocurrency trying to ensure a stable value to an existing Fiat currency through various means, be it cash-on-hand, government bonds, etc. An issuer of a stable coin is very much akin to a bank however, unless regulated as a bank, a stable coin issuer, like Circle’s USDC or Tether’s USDT may set their own terms & conditions on depositor guarantees, value of deposits, disputes, data privacy, etc. And if a stable coin issuer defaults, the issued stable coins would see value (and perhaps even deposits) evaporate. The Terra blockchain’s UST, is a de-centralized stable coin that tried (in apparent vain) to peg its value to USD through a seemingly dysfunctional algorithm. Until early 2022, Facebook (now Meta) had been working on proprietary DLT to support a stable coin called Diem, likely to amass even more personal data of users of Facebook services. Alas, Diem is no more, even as Meta is still at it to create its own currency.

Cryptocurrencies are not money

So, here’s the rundown on cryptocurrency: Bitcoin, Ether (ETH), Dogecoin or any of the other estimated 10,000 cryptocurrencies, are not money, or even currencies. They do not possess the needed characteristics of money, and very, very seldom are they used as such. Instead, they are a speculative investment into a highly, volatile, immaterial asset.

Read my other blog on that subject and why Bitcoin is bad.

Comments are closed.