Forget Bitcoin: Digital currencies can only work with government support


“Money is a matter of four functions: a means, a measure, a standard and a store.”

This song quoted by Alfred Milnes in the 1919 book entitled “The economic foundations of reconstruction” summarizes the four basic properties of money.

It is one of the basic concepts learned by studying economics, which will help us understand why decentralized digital currencies are unlikely to perform the same functions.

For the currency to fulfill its purpose, it must be:

1. Means of exchange
2. Measurement of value
3. Payment rule (deferred)
4. Value storage

In other words, it must be commonly accepted for transactional purposes, so you will not have to pay for one good with another good or service; it must accurately reflect the value of products and services; allows you to settle payments on deferred dates (i.e., debts); and can also be used to store value of what you want to sell (i.e., saved).

To serve well in at least three out of four of these functions, a currency must have a stable and predictable value.

The volatility of Bitcoin

It is difficult to accurately measure how much it is worth using a medium whose price fluctuates very constantly.

A $ 100,000 car would have cost 10 BTC in October, but less than two BTC today, and it is not known which way it will go in the coming months.

Bitcoin price history from 2016 to 2021 / Image credit: Coingecko

As you can see above, in the last five years, the price of Bitcoin has gone from $ 500 to $ 20,000, up to $ 3,500, up to $ 12,000, up to $ 5,500, and recently to over $ 60,000. In a few days, its value can fluctuate by 10 or 20 percent.

With such rapid and frequent changes, it creates chaos, as yesterday’s prices may be irrelevant today. In many ways, it’s like living in a country with hyperinflation, only the price changes quickly in both directions.

For the same reason, it is difficult to use digital currencies to settle deferred transactions. Most payments to the company are made on predetermined dates or within a defined future time period.

Contracts for the delivery of products or services can be settled within a window of a week, a month or even a quarter. Of course, as long as the value of a coin is predictable, it’s not a big deal, as it’s unlikely to change dramatically.

30 days is a fairly standard deadline for issuing payments. However, with cryptocurrencies that can skip a hundred percent in a period of weeks, you can’t predict what the deferred payment you agreed upon when the date expires might be worth. It would be very risky to run any business.

Finally, the worst accusation against digital currencies is their demonstrable inability to store value in a secure and predictable way, for the same reasons stated above.

If you saved your 10 BTC in October, you’ll obviously be very happy now: your $ 100,000 savings have turned into $ 500,000. But if you save 10 BTC today and price tanks to previous levels over the next few months, you’ll have a few hundred bucks left in your pocket.

You cannot stabilize the value of bitcoins

Bitcoin, like other cryptocurrencies, does nothing but store value. It can be treated as an investment or, more accurately, as a speculative bet, as there really isn’t much that the currency is backed apart from the dominant demand.

Today, traditional currencies are backed by entire economies with which the rest of the world participates (or not) in trade. This is further stabilized by central banks accumulating foreign reserves and using their power to print additional currency as needed, to ensure that the national currency remains stable and meets all four criteria.

Zimbabwe currency
Zimbabwe Currency / Image Credit: Wikipedia

Whenever local authorities cannot maintain this stability, disasters ensue, usually with the loss of value of local money to the point of becoming completely useless, such as in Venezuela or Zimbabwe.

Therefore, in some of the poorest and weakest countries, the preferred currency that is more easily accepted than local banknotes is usually the US dollar.

Because cryptocurrencies have no mechanism to stabilize their value in response to fluctuations, nor do they represent any particular market or country with which people are willing to trade, they do not have the anchors that hold their value in place.

National currencies provide access; you need them to buy goods and services in a given country. Whether you’re a local buying a burger, you’re a tourist visiting Disneyland, or a foreign government buys fighter jets, you’ll have to pay in U.S. dollars to complete the order in the United States.

It works the same anywhere else. If you want to visit Europe you need a few euros, if you go to China, get ready to buy some yuan, yen in Japan, ringgit in Malaysia, birr in Ethiopia, and so on.

However, decentralized cryptocurrencies are not really necessary for anything.

You can buy the same goods and services with dollars, pounds and euros. In fact, the only things that Bitcoin and others can open their doors to you are the illicit things, that you wouldn’t want them to be seen or that in any way continue to be bought, like drugs.

Not everything that shines is gold

The volume of Bitcoin is limited by design to 21 million and the units are becoming increasingly difficult to recover over time.

Outside the digital world, achieving price stability is done by adjusting the money supply to reflect the country’s economic growth (what is the role of central banks), but it is impossible to do so with cryptocurrencies due to their limitations. integrated and lack of exterior. control.

There are currently around $ 40 trillion in circulation in the world. In a simple example, it would mean that for BTC to replace them today, each coin would have to be priced at about $ 2,000,000.

And as the world grows, both economically and in terms of population, BTC shortages would keep their price on the rise. This contributes to the deflation of prices of all products and services which only exacerbates economic crises; as it causes people to stay in currency in anticipation of their higher future value, thus reducing economic activity leading to prolonged recessions.

The Gold Standard / Image Credit:

It is somewhat similar to the gold standard, when the money supply was related to a country’s ability to back its currency with the precious metal. If the government did not have enough, it would be trapped as it could not expand its money supply in response to economic growth.

Countries that abandoned the gold standard and were able to adjust their monetary policies more freely emerged from the Great Depression of the 1930s more quickly than those that did not. Ultimately, the whole system was unsustainable and collapsed with the floating fiduciary coins that took their place in the 1970s.

At the very least, however, the gold standard had the advantage of being based on a scarce metal that had a practical and intrinsic value.

You can take gold or silver anywhere in the world and exchange it for money, as there is always demand, but cryptocurrencies are not based on anything. If its value drops to zero, all you have is a digital record that you couldn’t even use as toilet paper.

There are alternatives, of course, like Ethereum, which do not have a total ceiling, at least in theory. But in all cases, the supply of currency is controlled by predetermined mathematical calculations that do not respond to changing economic reality.

Many people distrust governments and central bankers, but they remain a safer bet than a computer algorithm that continues to move forward regardless of the circumstances. Maintaining control in human hands means that policies can be adjusted quickly, in response to economic challenges.

Ironically, for all the useful applications of blockchain technology, using it for digital currencies is probably the least practical.

So much so, that even Tesla, which recently widely paraded the embrace of Bitcoin by allowing customers to pay for their cars using digital currency, claims in its disclosures that in case of return, the company will decide how to return the payment (either in BTC or in USD), and will assume all the risk. This means that they will give you back what costs them the least.

tesla bitcoin
Dissemination of Tesla / Image Credit: Tesla

In other words, the company doesn’t really treat Bitcoin as a currency, more as a form of payment, and is only interested in managing it on terms favorable to its business.

It is very possible that Elon Musk wanted to set up and stimulate wave-raising cryptocurrencies, so that the company itself (or him personally) could make a lot of money during the process.

Bitcoin should not be considered as a currency

The market is exciting thanks to its high volatility, as it allows speculators to make significant profits very quickly, but it also carries a risk of significant losses.

Owners of digital tokens have shed many tears depending on whether they bought too late or sold too early.

And for these reasons, we should not talk about Bitcoin et al as currencies because they simply do not meet the basic criteria to be so.

The pure idea of ​​digitizing money is excellent and perfectly rational nowadays.

Various blockchain applications open up many possibilities outside of finance, but in order for it to be widely used, it must be implemented in a controlled and regulated manner that can be trusted by millions of ordinary people who do not want to spend their lives. tracking daily exchange rates of some imaginary digital currencies.

For any currency to maintain a stable value, it must be managed by state authorities, setting realistic expectations and using monetary policy tools to achieve them.

It is simply not possible in the open source world of anti-establishment nerds. I’m sure independent digital currencies won’t disappear: they’re here to stay for both use and speculation, but the real revolution will happen when governments start issuing theirs.

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