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What’s the problem with cryptocurrency (Bitcoin)?

Bitcoin is not money

Theoretically and legally, cryptocurrencies like Bitcoin are not money, regardless of what some people think. Money has three functions: It is a medium of exchange, a unit of account and a store of value.

Not many goods and services are priced and billed using Bitcoin (or other cryptocurrencies). Bitcoin is not widely accepted as a unit of account and a means of payment. Granted, in the past few years, many cryptocurrency payment apps have been developed to encourage their use. But none of them made it to the core of the world’s daily transactions and payments [1], with the exception of some underworld transactions.

It is crucial that cryptos are valued in USD (or other fiat currencies). So they are no different from items in USD that are on the other side of the money in a transaction. Veteran Bitcoin investor Mark Cuban summed it up when he said:

“For cryptocurrency to be money, it (Bitcoin) has to be so easy to use that it is child’s play. First of all, it should be completely smooth and understandable for everyone. So easy that Grandma could do it. “[2]

To legally qualify as money, a means of payment must be granted the status of an official currency unit under the laws of a country. This legal tender status enables debtors to pay their obligations / liabilities by transferring them to creditors recognized and approved by law.

Recent research has shown that 80% of the world’s central banks are either not allowed to issue digital currency under applicable laws or that their legal framework is ambiguous and does not clearly allow it [3]. However, China passed a law in 2020 that allows its central bank to issue a digital currency [4]This is the hour of birth of the world’s first official digital currency, the Digital Currency Electronic Payment (DCEP). [5]. Although DCEP is digital, strictly speaking it is not a cryptocurrency.

Legal tender status is usually given to tender that can be easily transferred and used by the population in daily life. In order to use Bitcoin or cryptocurrencies, there must be a digital infrastructure in place that includes computers, smartphones, internet networks and connectivity. This condition makes it unrealistic for cryptocurrencies to become money. It reflects Mark Cuban’s argument against Bitcoin as money.

Bitcoin is a vehicle for speculators

Bitcoin supporters say it is an investable asset. Investable, yes (in a speculative sense in my opinion). Asset, i’m not sure.

A source of income is associated with a financial asset. Granted, there are zero return assets like commodities, but they are traded because they have a practical use (for production or consumption). Cryptocurrencies have neither a source of income nor a practical use.

The fact that they charge a price and are tradable suggests that speculation would be their main reason for existence. Hence, crypto prices are subject to violent and random movements. This raises the other problem, the store of value.

Bitcoin is not a store of value

In order for something to serve as a store of value, it must be fluid, generally recognized and of stable value. Cryptocurrencies, including Bitcoin, certainly do not have any of these properties.

Bitcoin trading suffers from illiquidity and manipulation due to the existence of “whale wallets” (wallets with disproportionately large amounts of bitcoins).

At the end of 2020, the top 100 wallets owned an estimated 13% of the total Bitcoin supply (6), with most of the identities of the owners unknown. It would therefore take only a few whale wallets to manipulate the Bitcoin market, which would lead to violent price movements. Due to the enormous price volatility, Bitcoin and cryptocurrencies are unsuitable as a store of value.

Fixed care is a problem, not necessarily a benefit

Contrary to conventional wisdom that the limited supply of bitcoins and cryptos is an asset and protects value, it is indeed a big problem when they are viewed as money.

The maximum number of bitcoins that can ever be mined is 21 million. At the time of writing, there are already 18.6 million bitcoins in circulation. The last bitcoin would be mined in 2040. All cryptocurrencies have limited supply and the speed at which they can be increased is uncertain and cannot be controlled by anyone.

These supply restrictions make cryptocurrencies unsuitable as legal tender, as the static “money supply” would deprive central banks of the ability to take countercyclical measures.

However, crypto promoters have benefited from the widespread fear and distrust of fiat money that has resulted from monetization following the global financial crisis (GFC). They cleverly turned this supply problem into an argument for cryptocurrencies to hedge against doomsday scenarios. I think that’s wrong.

What now?

China, which used to be the largest crypto-mining country, has seen through smoke and mirrors and unreservedly taken action against trade and mining. This shows how quickly regulators could free-wheel the decentralized crypto market. Instead, China has created an official DCEP with centralized control.

What crypto lovers don’t seem to understand is that countries will take steps to protect their monetary systems and currencies, as well as their ability to tax and manage the economy. The more people believe that cryptocurrencies are money, the greater the risk of government interference in this market. The emerging trend of official digital currencies is a sign that central banks are fighting back.

The popular narrative that Bitcoin’s limited supply guarantees its value may raise concerns about the central bank’s quantitative easing and the importance of these QE programs to fiat money. Hence, the rise in cryptocurrencies can be seen as an expression of the anti-establishment movements in many countries since the GFC 2008.

On the positive side, this “crypto protest” could lead governments to change their economic management to become more responsible and regain trust and credibility. We will see.

I believe that crypto prices will crash at some point. This could be triggered by a change in monetary policy or regulations. Alternatively, a crash could simply happen because prices are so high that, similar to the Dutch tulip craze, marginal buyers are pushed out of the market, resulting in a self-nourishing liquidation process and falling prices when leveraged investors start selling.

Also read:

Crypto renminbi challenges US dollars

[1] Many gold machines and settlement mechanisms were installed around the world in the early 2010s as players sought to promote the use of gold as an alternative to fiat money and as a medium of exchange for daily transactions. However, they failed due to poor public acceptance and the inconvenience of using gold for transactions. I believe that crypto apps could suffer a similar fate.

[2] See “Mark Cuban: This is needed to change my mind about Bitcoin,” NECN Money Report, Jan 12, 2021, -dies -is-what-it-for-me-to-change-my-opinion-about-Bitcoin / 2387139 /

[3] “Legal Aspects of Central Bank Digital Currency: Central Bank and Currency Law Considerations,” IMF Working Paper WP / 20/254, November 2020.

[4] See “China Legalizes Digital RMB and Bans Competitors,” Lexology, Nov. 12, 2020, and

“China’s New Bill to Legalize the Digital Yuan, but Ban Competitors,” Coingeek, October 29, 2020, and

“China Adopts Cryptography Law in Preparation for Digital Currency,” Reuters, October 27, 2019

[5] See “Chi on China: The Crypto Renminbi Disrupted Market, Economic Growth, and Politics,” August 5, 2020.

[6] See Bitcoin Cash Rich List from BITAMP and also “Bitcoin Whale”, Investopedia

All views expressed here are those of the author at the time of publication, are based on available information and are subject to change without notice. Individual portfolio management teams can have different views and make different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income from them can go down as well as up and investors may not get back their initial outlay. Past performance is no guarantee of future returns.

Investments in emerging markets or specialized or restricted sectors are likely to be subject to above-average volatility due to a high degree of concentration, greater uncertainty due to less information available, less liquidity or due to a greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than most internationally developed markets. As a result, portfolio transaction, liquidation and maintenance services on behalf of funds invested in emerging markets may involve greater risk.

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