Follow Paul Donovan

Are crypto-currencies currencies?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • Crypto-currencies like bitcoin fail two key tests of what makes a currency a currency.
  • No currency has a natural value. The fact that bitcoin is just computer code does not matter. Bitcoin has the same natural value as gold (also zero).  Currencies have value because they can buy things that are useful. People know that they can exchange currency for goods and services to improve their life.
  • Crypto-currencies are very unlikely to be used for the world's most important activity.  Over a third of economic activity in the OECD goes toward paying taxes. Governments that print money will not accept crypto-currencies for tax. Thus, crypto-currencies are useless for the biggest payment in any economy.
  • Crypto-currencies are useless as a store of value. This is not about size. The Singapore dollar is small, but an excellent store of value. Each crypto-currency's supply is relatively fixed, but demand swings wildly. Values swing wildly as a result. Bitcoin's early September collapse created a bitcoin hyperinflation for goods and services. This was worse than the early months of Weimar Germany's hyperinflation.
  • Unless governments choose to abandon their money monopoly, crypto-currencies will never be used for the majority of economic activity. More crypto-currency hyperinflation is likely.  Bubbles are not currencies.