Home Deliberation Why Cryptocurrency Is Not Currency

Why Cryptocurrency Is Not Currency

In its current form, cryptocurrency can be best described as an asset that people invest in, with the hope of making money when its value appreciates, similar to other assets such as gold, real estate and silver, among others. However, unlike gold, real estate and silver, they are yet to have any real-world applications or usage as true currencies.

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“All that glisters (glitters) is not gold,” said William Shakespeare, English playwright and poet, in his 16th century play The Merchant of Venice — a reminder of the difference between appearance and reality.

This adage is particularly relevant in the context of a 21st century revolution known as cryptocurrency, a portmanteau of cryptography (the art of creating codes to keep information secret) and currency (a system of money in a country).

In other words, cryptocurrency can be regarded as a digital or virtual currency that relies on encryption to secure transactions, and functions in a decentralized manner, i.e., outside government or institutional control.

Bitcoin was the world’s first decentralized cryptocurrency, created by the pseudonymous Satoshi Nakamoto in 2009; since then, the number of cryptocurrencies has swelled to over 4,500, as of April 2021, including Ethereum, Tether and Binance Coin, to name a few.

Chart: Number of actively traded cryptocurrencies (2013-2022).
Note: Data till February 2022. 2020 data not available.
Source: Statista

However, cryptocurrencies fail to satisfy some fundamental characteristics of a conventional currency (like the Indian rupee or U.S. dollar), and may therefore turn out to be the glittering non-gold that Shakespeare was referencing five centuries ago.

Don’t accept the unaccepted

For you to legally buy and sell something using a particular currency, it needs to be backed by a country’s government and central monetary authority. This makes the currency legitimate and acceptable in the eyes of the public.

For example, all Indian rupee notes are signed by the Governor of the Reserve Bank of India — India’s central monetary authority — and their values are guaranteed by the union government (epitomized in the words ‘promise to pay the bearer’ in every note).

Image: The legitimacy of the Indian rupee (Rs. 10 note as shown) is guaranteed by the Governor of the Reserve Bank of India.
Source: Jagranjosh

However, cryptocurrencies are yet to be legally accepted for transactions by almost all countries in the world, as no government or monetary authority has officially legalized them till date. In other words, you cannot buy or sell something using cryptocurrency without breaking the law.

The only exception is El Salvador in Central America which adopted Bitcoin as a legal currency in September 2021. (Note that many countries allow people to invest in cryptocurrencies, but none allow people to buy and sell any goods and services using them.)

Mind the volatility

Currencies like the Indian rupee and U.S. dollar gradually lose their value over time due to inflation — rise in the prices of goods and services; in comparison, cryptocurrencies are highly volatile over a comparatively shorter span of time.

For reference, the Indian rupee expressed in terms of U.S. dollar has depreciated by 12% between January 2017 and February 2022; in the same period, Bitcoin is up 4,200%.

Chart: Value of Indian rupee in U.S. dollar (2017-present).
Source: TradingView
Chart: Value of Bitcoin in U.S. dollar (2017-present).
Source: TradingView

Bitcoin, for instance, fell by 37% in value between May 1 and June 1, which is equivalent to your Rs. 100 note becoming Rs. 63 in a month’s time. “It is as though your $10 bill could buy you a beer on one day, and a bottle of fine wine on another,” The Economic Times reported in June 2021.

A variant of cryptocurrency known as stablecoins are relatively less volatile as they are pegged to stable assets such as commodities (like gold and oil), and ironically, national currencies (like U.S. dollar). Examples include Paxos Gold and Tether.

However, this dependence on other assets (with value of their own) takes away their ability to react to market forces like most national currencies.

Crypto heist

Cryptocurrency transfers from one digital wallet to another, while possible, are irreversible. In case one transfers their cryptocurrency to an unknown person or entity by mistake, there is no way to retrieve them, unless the recipient initiates the return on their own.

Further, a digital wallet is accessible only with an exclusive private key, which if forgotten, means that the cryptocurrency stored in the wallet becomes irrecoverable. The same would be the case if the wallet becomes a victim of malicious activities (like hacking).

Neither the banks nor the police would be of any help, since cryptocurrency transactions are currently illegal and unregulated by almost all governments and monetary institutions across the world.

Lack of regulation also plagues crypto-exchanges, which are online platforms where one can invest in cryptocurrencies. In 2019, 12 such exchanges reported cryptocurrency thefts worth $290 million, rising to $300 million in 2020 and involving as many as 28 exchanges.

Overall, investors have lost over $9 billion between 2017 and 2021 in cryptocurrency thefts.

Chart: Cryptocurrency thefts between 2017 and 2020 (in USD million).
Source: Reuters, Security Magazine, Financial Express

Flawed democracy (ft. memes)

Cryptocurrency seeks to democratize financial transactions by enabling direct transfers between two digital wallets, hence bypassing the fees, charges and other restrictions imposed by intermediaries such as banks.

However, a third of the world’s adult population does not have access to banking services and only 2% have a mobile money account; further, a third of the world’s population is yet to have adequate access to the internet.

Unequal financial literacy and digital access might result in well-informed investors garnering the benefits of cryptocurrency, while the less-informed might take on risks they do not fully comprehend, The Economic Times surmised in the June 2021 article.

Then there are the so-called ‘meme coins’ like Dogecoin and Shiba Inu, which are based on popular internet memes. Meme coins are widely regarded as having even lesser value than other forms of cryptocurrency, since they originate from jokes and puns.

These are likely to exacerbate the situation for novice investors who place more value on their novelty factor and popularity rather than underlying value.

If not currency, then what is cryptocurrency?

Cryptocurrencies do satisfy some basic features of a currency: They are portable, since they are stored in digital wallets; they are divisible into smaller units (known as tokens); and they are durable, i.e., they cannot be easily destroyed.

They also enjoy mass appeal, especially among its approximately 300 million investors, as of April 2021, including American rapper Snoop Dogg, former boxer Mike Tyson and Tesla’s Elon Musk.

However, as stated above, they do not fulfill some important and fundamental aspects of a currency. In the words of Warren Buffet, Chairman of American holding company Berkshire Hathaway, “It’s not a currency [because] it does not meet the test of a currency.”

In its current form, cryptocurrency can be best described as an asset that people invest in, with the hope of making money when its value appreciates, similar to other assets such as gold, real estate and silver, among others.

However, unlike gold, real estate and silver, they are yet to have any real-world applications or usage as true currencies. “Cryptocurrencies basically have no value and they don’t produce anything,” said Buffett. “In terms of value: Zero.”

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