Bitcoin and other cryptocurrencies have the serious potential to revolutionize the financial world as we know it in the next few years. They have the possibility to recast the way we make payments, buy goods and services, and more.
One of the main revolutionary factors that they have led is that bitcoin is a decentralized currency, which means that there is not a Central Bank that prints money and that it has its own goals, objectives, and rules to apply.
In fact, Central Banks, since the introduction of the fiat monetary system (after Nixon shock) have the objective to implement the monetary policy through the management of money supply and have a specific mandate that must be at the basis of their everyday operations, for example, the ECB has to maintain price stability by setting key interest rates and by controlling the union’s money supply.
With the adoption of decentralized cryptocurrencies, we could see the introduction of a new paradigm, the birth of a new monetary system where financial institutions have less power and have to take into consideration the presence of these new currencies.
However, at the moment, it is not the case.
In fact, Bitcoin (as well as other major cryptocurrencies) lacks some basic qualities and attributes that it should need in order to be considered as a proper currency, in fact, what different forms of money have in common is:
- First: Money is a store of value.
If I work today and earn 10 dollars, I can hold on to the money before I spend it because it will hold its value until tomorrow, next week, or even next year. However, although it is an efficient store of value, money is not a perfect store of value, in fact, economic phenomenons like inflation could slowly erode the purchasing power of money over time.
- Second: Money is a unit of account.
This means that money works also as a universal unit that people can use to measure value in economic transactions.
For example, if you are shopping for a new pair of shoes, the price could be quoted in terms of t-shirts, cows, or corn. So, for instance, your new pair of shoes might cost you 10 to 50 bushels of corn at today’s prices, but you would find it most helpful if the price were set in terms of money because it is a common measure of value across the economy.
- Third: Money is a medium of exchange.
This means that money is widely accepted as a method of payment. When you go shopping in a store, you can be confident that the cashier will accept your payment of money. In fact, U.S. paper money carries this statement: “This note is legal tender for all debts, public and private.” This means that the U.S. government protects my right to pay with U.S. dollars.
Given these common attributes that money must have, with respect to major currencies like the U.S: Dollar, the Euro, or the Japanese Yen, Bitcoin lacks the first and the third attribute.
The lack of these basic aspects makes it impossible to consider bitcoin as a proper currency yet.
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Too much volatility
One first aspect which prevents Bitcoin from bein considered as a currency is that it lacks the ability to behave as a store of value because of its high degree of volatility.
As an example, you can look at the graph above, this is the price of Bitcoin in U.S. Dollars, from the 24th to the 31st of January 2020. In a period of 7 days, the price starting at around 8300$ went up to over 9500$, a 14% increase!
While in the following graph we can look at the movements made, in the same time period, by the EUR/USD.
As you can see in this other graph, in the case of the EUR/USD, for the same period (24th to the 31st of January 2020), the pair had an oscillation of about 0,005%, from 1.099 on the 29 to 1.105 on the 31.
Not widely accepted
Moreover, for what concerns the third quality (Money is a medium of exchange), Bitcoin cannot be considered a proper medium of exchange, it is not widely accepted, which means that is very hard, almost impossible, to find stores (online and offline) that accept payments in Bitcoin, therefore is hard to use it on a daily basis.
This could be caused also by the extreme degree of volatility described before, which makes it often too risky to hold it in a bank account for days because it could lose a substantial percentage of its value even in a matter of weeks.
Other major currencies like the U.S. Dollar or the Euro are perceived as safer because you are almost certain that one year from now your $100 will be able to buy almost the same goods as this year, this is a crucial factor for the success of a currency.
All the aspects that I have highlighted before are not the opinion of someone who hates Bitcoin or cryptos in general, in fact, we can even listen to Jack Dorsey, founder of Twitter and Square which is a strong advocate of digital currency and Bitcoin, but says that:
“It’s not functional as a currency. The peaks and troughs are like an investment asset and are equivalent to gold”
“What we need to do is make it more usable and accessible as a currency, but it’s not there yet” — Jack Dorsey on CNBC
Bitcoin or other kinds of cryptocurrency will almost certainly go mainstream, however, they are not there yet.
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