Why Bitcoin Can Never Be A Real Currency
Bitcoin has seriously claimed 2017. This year alone, the price of Bitcoin has increased 2000 percent, bringing its starting value of $1,000 to over $20,000 last week. The terrifying momentum of today’s biggest cryptocurrency has pitched many experts and finance enthusiasts against each other. Is it a bubble about to burst any second? Is the era of digital currency finally being ushered in? Are digital currencies such as Bitcoin poised to replace fiat money?
There are many facts, opinions, uncertainties, and even scams that surround this roaring new currency. But according to many financial experts, no matter the volatility of its price, no matter the strength it exhibits today, no matter the number of backers and critics, at the end of the day, cryptocurrencies like Bitcoin will never make fiat money obsolete—because it can never be a real currency.
According to Paul Donovan, senior economist at the Swiss banking giant UBS, the problem with Bitcoin and all other cryptocurrencies is that it will never tick two boxes that are required to be considered fiat money like dollar or the peso.
Business Insider quotes Paul Donovan, saying, "The problem that cryptocurrencies face is that they fail the two key metrics of what makes a currency a currency. A currency has to be a widely used medium of exchange. Cryptocurrencies are never going to achieve that. Period."
According to Donovan, one of the biggest flaws of cryptocurrencies is that governments will not accept cryptocurrencies for tax payments. Governments will never accept currencies that they don’t control. On average, 34 percent of all economic activity is taxed. And if taxes, one of the largest single transaction in any economy, couldn’t be paid in Bitcoin, then it will never be a majority medium of exchange.
The basic law of supply and demand will surely take its toll on cryptocurrency, as well. Donovan said, "The fatal issue for cryptocurrencies is that the supply of them can only ever go up. There is unlimited upside to the supply of cryptocurrencies."
Supply of cryptocurrency has started to take a boost in the recent boom of initial coin offerings, where startups offer digital tokens and coins in exchange of real money investments in their projects. Over $3 billion has already been raised by ICOs this year.
Fiat money is regulated by a central bank, which means that the bank can reduce the supply of money if demand goes down, and vice versa. But in cryptocurrency, this is not the case. You get these unending rise of supply, with the demand unable to keep up. Donovan notes, “And because you cannot reduce the supply of a cryptocurrency, that drop in demand would not be matched by a drop in supply, and, therefore, if demand goes down but supply does not, we all know what happens to value. It is basic economics.”
The second box that fiat money ticks is its ability to act as a store of value. While fiat currencies fluctuate on a daily basis, cryptocurrencies fluctuate on much more dangerous and volatile levels. Peso, for example, only dropped 0.3 from its value of 50.745 on November 16 to 50.410 on December 17. Bitcoin, however, has shoot up immensely in a month’s time, trading at $7,579 on November 16 up to $17,605 on December 16.
Value of fiat money should never fluctuate massively. And Bitcoin can’t do that.
Donovan explains, "Bitcoin, in particular, has had, I think, three hyperinflation episodes this year. That is not a particularly stable store of value.”
Imagine if on November 16, you paid 0.0008 Bitcoin for a cup of coffee at Starbucks, which let’s say is around 200 pesos. If you bought that same cup of coffee with Bitcoin on December 16, you would have paid 464 pesos for it. Sounds good? We don’t think so.
And if people are unwilling to spend Bitcoin on actual goods, then it adds up to the first conundrum that Bitcoin couldn’t be used widely as a medium of exchange.
With the rate of production of cryptocurrencies nowadays, and the reluctance of the governments all over the world to regulate it or even acknowledge it, then there’s not much hope for the establishment of this new currency.
What do you think? Do you have the heart and the guts to join the Bitcoin craze?