Today’s digital world is fast, connected and globalised like never before. The internet has led to the creation of virtual marketplaces where anyone can buy or sell anything – from second-hand clothing to vintage cars. Because of this, we no longer live in a world where money is green or yellow; but one where everything has its own price tag. A growing number of people are investigating ways to invest their money into something other than traditional assets like gold, real estate and cash. In response, an increasing amount of people are now investing in cryptocurrencies such as Bitcoin. But what exactly are these so-called ‘digital coins’? And why should you consider buying them?
In my experience with banking- and retail payments infrastructure, I’ve worked longer than I’d like to admit. My insatiable curiosity about all things digital, especially within my profession, has led me to add distributed ledger technology, blockchain, tokenization, cryptocurrencies, as well as central bank digital currencies to my areas of subject matter expertise.
Seeing as Tom, Dick, Harry, and, sadly, El Salvador have gotten into cryptocurrency, and Gucci and both Mastercard and Visa provide real-life spending capabilities, I thought it important to give things to think about to those who have engaged in or are considering engaging in the cryptocurrency space.
What is money?
Money actually refers to a generally accepted, recognized, and centralized medium of exchange in an economy, which facilitates the trading of goods and services. Above all, and at the heart of such money is trust in its worth – as well as a complete financial eco-system. Banks play a crucial role in providing that trust. The government achieves this by maintaining price stability and low inflation, maintaining financial stability, and issuing fiat money.
As time has progressed, and for practical reasons, states and governments have allowed the private sector to take on a more significant role in our financial eco-system, and we have collectively come to trust commercial banks with our money. Our bank account serves as a secure storage place for our money through a vast, regulatory framework.
We hereby accept and agree to use various payment initiation methods instead of bank issued cash, including online banking, cheques, credit and debit cards, Apple Pay, Google Pay, Swish, Twint, Venmo, Vipps, MobilePay, etc.
[Some of] the trouble with cryptocurrency
The Bitcoin system might have been envisioned as “A Peer-to-Peer Electronic Cash System” by Satoshi Nakamoto, who has not yet been identified. Bitcoins, as we understand them, are not a form of money, let alone a form of payment.
- Several of the accepted characteristics of money are breached by Bitcoin and most other cryptocurrencies: The most obvious is that their value is unstable. They are often compared to the US Dollar because of their highly volatile value. Every 5 months between September 2020 and October 2021, Bitcoin’s purchasing power doubled, meaning that every 5 months you could buy half as many items with the same amount of Bitcoin (or the same amount of Bitcoin could buy twice as much).
The Bitcoin money example would have been a rare example of deflation, where delaying purchasing something today will give you more of it tomorrow. Therefore, cryptocurrencies are mainly bought as speculative investments, and supposedly one should HODL them. This strategy, however, appears to be a bad one as of the time of writing.
- As a medium of exchange of value (payment), they are not generally accepted, recognized, or centralized. According to Chainalysis’ CEO, only 2% of cryptocurrency traffic is actually a payment in 2021. According to a recent Coinbase study, 33% of UK consumers have bought cryptocurrency.
The majority of UK consumers have turned to cryptocurrencies because of FOMO and the hope of becoming wealthy…. Chainalysis estimates that North Korea earns upwards of 10% of its GDP from stolen crypto assets, most notably Bitcoin and Ether. This cryptocurrency is either stolen outright from exchanges or is paid as ransom through ransomware attacks.
- Poor network performance. As a result of the inherent inefficiencies of certain blockchain-based cryptocurrencies, they are unable to cope with the volume of transactions, or the throughput, that a generally accepted form of payment would demand.
There are only 4.6 transactions per second on the Bitcoin blockchain compared to 1,700 on the Visa network! In contrast, Ethereum plans to allow upwards of 100,000 transactions per second before 2023 (up from today’s 30).
- Regulation is lacking. A society relies on monetary regulation to ensure that everyone follows the same rules, including taxes to fund services such as infrastructure, social services, military, police, education, and governmental services. As in the financial sector today, cryptocurrency needs to be regulated, but by whom?
Through various means, such as cash on hand, government bonds, etc., stable coins attempt to ensure a stable value to a Fiat currency. Although a stable coin issuer is very much like a bank, unless regulated as a bank, stable coin issuers, such as Circle’s USDC or Tether’s USDT, can set their own Terms & Conditions related to depositor guarantees, value of deposits, disputes, data privacy, etc.
In the event of an issuer default, the issued stable coins would lose their value (and perhaps even their deposits). Terra’s UST is a decentralized stable coin that tries (in vain, it seems) to peg its value to USD through an algorithm that appears dysfunctional. It is likely that Facebook (now Meta) will amass even more personal data of users of Facebook services by using proprietary distributed ledger technology (DLT) to support its stable coin Diem in early 2022. Sadly, Diem is no longer, though Meta is still trying to create its own currency.
Cryptocurrencies vs Fiat MoneyHere’s what cryptocurrency is all about: Bitcoin, Ether (ETH), Dogecoin, and any of the other estimated 10,000 cryptocurrencies are not money, or even currencies. It is very rare that they are used as money as they do not possess the required characteristics. It is a speculative investment into an immaterial, highly volatile asset.
Via this site.