“Money is a function of four: a medium, a measure, a standard and a business.”
This song, quoted by Alfred Milnes in 1919, entitled “The Economic Foundations of Reconstruction” sums up the four fundamental properties of money.
This is one of the basics you learn while studying economics. This helps us understand why decentralized digital currencies are unlikely to perform the same functions.
In order for the currency to serve its purpose, it must be:
1. Medium of exchange
2. Measure of value
3. Standard of (deferred) payment
4. Store of value
In other words, it needs to be generally accepted for transactional purposes so that you don’t have to pay for one good with another good or service. it must accurately reflect the value of products and services; it enables settlement of payments on deferral dates (i.e. debts); and it can also be used to store the value of everything you sell (ie store).
To function well in at least three out of four of these functions, a currency must have a stable, predictable value.
It is difficult to measure exactly how much something is worth with a medium whose own price fluctuates widely.
A $ 100,000 car would have cost 10 BTC in October, but less than two BTC today – and there is no telling what direction it will take in the next few months.
Bitcoin’s price development from 2016 to 2021 / Photo credit: Coingecko
As you can see above, over the past five years, Bitcoin went from $ 500 to $ 20,000, then to $ 3,500, to $ 12,000, to $ 5,500, and recently to over $ 60,000. In just a few days, its value can fluctuate by 10 or 20 percent.
With changes so fast and frequent, chaos ensues as yesterday’s prices may be irrelevant to today. In many ways, it’s like living in a hyperinflationary country – only the price is changing rapidly in both directions.
For the same reason, it is difficult to use digital currency to process deferred transactions. Most in-store payments are made on set dates or within a defined future time frame.
Contracts for the delivery of products or services can be concluded within a time window of a week, a month or even a quarter. Obviously, as long as the value of a currency is predictable, this is not a big deal as it is unlikely to change dramatically.
30 days is a pretty normal time frame for issuing payments. However, since cryptocurrencies can jump a few hundred percent over a period of weeks, you cannot predict the value of the deferred payment you have agreed upon when it becomes due. This would make running a business very risky.
After all, the worst charge against digital currencies is the proven inability to store value in a safe and predictable way – for the reasons stated above.
Obviously, if you saved your 10 BTC in October you are very happy now – your savings of $ 100,000 have turned into $ 500,000. But if you save 10 BTC today and the price tanks to earlier levels in the next few months, you’ll be a few hundred grand out of pocket.
They cannot stabilize the value of bitcoins
Bitcoin – like other cryptocurrencies – does everything but store value. It can be treated as an investment or, more precisely, speculative gambling as there really isn’t much that the currency is hedged with other than prevailing demand.
Traditional currencies are currently supported by entire economies with which the rest of the world either trades (or not). This is further stabilized by the fact that central banks amass foreign exchange reserves and use their power to print additional currencies if necessary to ensure that the local currency remains stable and meets the four criteria.
Zimbabwe Currency / Photo Credit: Wikipedia
If the local authorities are unable to maintain this stability, disasters arise, and as a rule local funds lose value until they become completely worthless, as in Venezuela or Zimbabwe.
Because of this, in some of the poorest and most vulnerable countries, the preferred currency that is more easily accepted than local banknotes is often the US dollar.
Since cryptocurrencies do not have mechanisms that would stabilize their value in response to fluctuations, nor represent a particular market or country that people want to trade with, they lack the anchors that would hold their value in place.
National currencies provide access; You need them to buy goods and services in a particular country. Whether you’re a local buying a burger, a tourist visiting Disneyland, or a foreign government sourcing fighter jets, you must pay in US dollars to complete the order in America.
It works the same in every other place. If you want to visit Europe you will need a few euros. When traveling to China, prepare to buy Yuan, Yen in Japan, Ringgit in Malaysia, Birr in Ethiopia, etc.
However, decentralized cryptocurrencies are not really necessary for anything.
You can buy the same goods and services with dollars, pounds, euros. In fact, the only things Bitcoin and others can open the doors for you are the illegal stuff that you don’t want to see or want to track in any way, like drugs.
Not everything that glitters is gold
Bitcoin’s volume is limited to 21 million by design, and the units will become increasingly difficult to mine over time.
Outside of the digital world, price stability is achieved by adjusting the supply of money to match the country’s economic growth (what role do central banks play), but cryptocurrencies cannot be controlled due to their built-in restrictions and lack of external control.
There are currently around $ 40 trillion worth of currencies in circulation around the world. In a simple example, this would mean that for BTC to replace it today, each coin would have to be priced around $ 2,000,000.
And as the world grows both economically and in population, the scarcity of BTC would keep the price rising. This contributes to the price deflation of all products and services, which only exacerbates the economic crisis. as it makes people cling to the currency in anticipation of its higher future value, thereby reducing economic activity, leading to prolonged recessions.
The gold standard / Photo credit: Metals.com
It’s a bit like the gold standard when the supply of money was linked to a country’s ability to support its currency with the precious metal. If the government didn’t have enough of it, it got stuck as it couldn’t expand its money supply in response to economic growth.
Countries that deviated from the gold standard and were able to adjust their monetary policy more freely emerged from the Great Depression of the 1930s faster than those that did not. Ultimately, the whole system was unsustainable and collapsed when free-floating fiat currencies took their place in the 1970s.
At least one advantage of the gold standard was that it was based on a scarce metal that had intrinsic, practical value.
You can take gold or silver and exchange it for money anywhere in the world as there is always demand, but cryptocurrencies are not based on anything. When its value drops to zero, the only thing you’ll be holding is a digital record that you couldn’t even use as toilet paper.
Of course there are alternatives like Ethereum, which – at least in theory – have no maximum upper limit. In any case, however, the supply of currency is controlled by predetermined mathematical calculations that do not react to changing economic realities.
Many people distrust governments and central bankers, but they are still more secure than a computer algorithm that keeps plowing no matter the circumstances. Having control in human hands means that policies can be quickly adapted to economic challenges.
Ironically, for all of the useful applications of blockchain technology, perhaps the least practical is using it for digital currencies.
So much so that even Tesla – which recently largely demonstrated its acceptance of Bitcoin by allowing customers to pay for their cars with the digital currency – states in its claims that if it is returned, the company will decide how the money will be returned you want payment (whether in BTC or USD) and you bear all of the risk. This means that they will give you back everything that costs them less.
Tesla Disclosure / Image Credit: Tesla
In other words, the company doesn’t really treat Bitcoin as a currency – rather as a payment method – and is only interested in handling it in terms that are favorable to its business.
It is entirely possible that Elon Musk wanted to both ride and stimulate the wave-lifting cryptocurrencies so that the company himself (or he personally) could make a huge amount of money in the process.
Bitcoin should not be viewed as a currency
The market is exciting because of its high volatility as speculators can make substantial profits very quickly, but there is also the risk of heavy losses.
Many tears have been shed by digital token owners depending on whether they bought too late or sold too early.
And for these reasons, we shouldn’t be talking about Bitcoin et al. Talking about currencies as they just don’t meet the basic criteria to be one.
The very idea of digitizing money these days is excellent and perfectly rational.
Different uses of the blockchain open up many possibilities outside of finance. However, in order for it to be widespread, it must be implemented in a controlled and regulated manner that can be trusted by millions of ordinary people who do not want to keep track of their daily exchange rates of some imaginary digital coins.
In order for a currency to maintain a stable value, it must be managed by the state authorities, set realistic expectations and use monetary policy instruments to achieve them.
In the open source world of anti-establishment nerds, that’s just not possible. I’m sure independent digital currencies aren’t going away – they’re here to stay for both use and speculation, but the real revolution will happen when governments start issuing their own.