How Does Bitcoin Qualify To Be Money?

Bitcoin is non money

Theoretically and legally, cryptocurrencies such as bitcoin are not money despite what some people may remember. Money serves three functions: it is a medium of exchange, a unit of account and a store of value.

Not many goods and services are priced in and settled by bitcoin (or other cryptocurrencies). Bitcoin is not universally accepted as a unit of account and a means of payment. Granted, many cryptocurrency payment apps have been created in recent years to promote its utilise. But none of them has made it to the core of the world's daily transactions and payments [i], except for some underworld transactions.

Crucially, cryptos are priced in USD (or other fiat currencies). So they are no different from any item priced in USD standing on the opposite side of money in a transaction. Veteran bitcoin investor Mark Cuban summarised it succinctly when he said:

"For cryptocurrency to be coin, it (bitcoin) would accept to be so easy to use it'due south a no-brainer. Information technology would have to exist completely friction-free and understandable past everybody first. Then easy, in fact, that grandma could do information technology".[2]

To legally qualify as money, a means of payment must be granted a status by a country's laws every bit its official monetary unit. This legal tender status allows debtors to pay their obligations/liabilities past transferring them to creditors as recognised and approved by constabulary.

Contempo research establish that 80% of the world'due south key banks were either not allowed to issue digital currency under the existing laws, or their legal frameworks are ambiguous and do not clearly allow them to do so [3]. Red china, however, passed a law in 2020 assuasive its primal depository financial institution to issue a digital currency [four], hence the birth of the world'south first official digital currency, the Digital Currency Electronic Payment (DCEP) [5]. Despite being digital, DCEP is strictly speaking not a cryptocurrency.

Legal tender status is commonly given to means of payment that tin can exist easily transferred and used by the population in daily life. To use bitcoin, or cryptocurrencies, a digital infrastructure including computers, smartphones, internet networks and connectivity must be in identify. This condition makes it unrealistic for cryptocurrencies to go money. It echoes Mark Cuban'south argument against bitcoin as money.

Bitcoin is a vehicle for speculators

Bitcoin supporters say it is an investible nugget. Investible, aye (in the speculative sense, in my view). Nugget, I am not sure.

There is an income stream associated with a financial asset. Granted, at that place are assets with a zero yield such as bolt, but they are traded because they have a practical use (for production or consumption). Cryptocurrencies have neither an income stream nor a applied use.

The fact that they command a price and are tradable suggests that speculation would exist their single most important 'raison d'être'. Hence crypto prices are discipline to violent and random movement. This brings up the other problem, store of value.

Bitcoin is not a store of value

For something to serve as a store of value, it has to be liquid, universally accustomed, and take a stable value. Cryptocurrencies including bitcoin certainly do not have any of these characteristics.

Bitcoin trading suffers from illiquidity and manipulation because of the being of "whale wallets" (wallets holding disproportionately large amounts of bitcoins).

In tardily 2020, the height 100 wallets were estimated to ain 13% of total bitcoin supply (6) with most of the owners' identities not known. It would therefore but take a few whale wallets to manipulate the bitcoin market, causing violent price moves. Huge price volatility has made bitcoin and cryptocurrencies unsuitable as shop of value vehicles.

Fixed supply is a problem, not necessarily a benefit

Opposite to the conventional wisdom that the finite supply of bitcoins and cryptos is a benefit and protects value, it is in fact a big problem for them being considered as money.

The maximum number of bitcoins that can ever be mined is 21 million. At the time of writing, there are already 18.6 1000000 bitcoins in apportionment. The final bitcoin would be mined in 2040. All cryptocurrencies have a finite supply and the speed at which they can be increased is uncertain and not controllable past anyone.

These supply limitations make cryptocurrencies unsuitable equally legal tender because the static 'money supply' would deprive central banks of the ability to conduct countercyclical policy.

However, crypto promoters have capitalised on widespread fear and distrust of fiat money arising from post-Global-Financial-Crunch (GFC) monetisation. They take skillfully twisted this supply problem into an statement for cryptocurrencies every bit a hedge against doomsday scenarios. I believe this is incorrect.

What adjacent?

China, which used to be the largest crypto mining country, has seen through the smoke and mirrors and has cracked down on trading and mining without reservation. This shows how quickly regulators could destroy the freewheeling, decentralised crypto marketplace. Mainland china instead has created an official DCEP with centralised control.

What crypto aficionados do not announced to sympathise is that countries will take steps to protect their budgetary systems and currencies and their ability to taxation and manage the economy. The more people believe cryptocurrencies are money, the greater the run a risk of government intervention in this market. The emerging trend of official digital currencies is a sign of central banks fighting back.

The popular narrative that bitcoin's finite supply guarantees its value tin play into concerns over central bank quantitative easing and what these QE programmes might mean for fiat money. Thus, the ascension of cryptocurrencies tin be seen as reflecting the anti-institution movements in many countries since the 2008 GFC.

Viewed positively, this 'crypto protest' could prompt governments to change their economical management to become more responsible and regain trust and brownie. Time will tell.

I believe crypto prices will eventually crash. This could be triggered by a shift in monetary policy or regulations. Alternatively, a crash could only occur because prices are then inflated that much similar the Dutch tulip mania, marginal buyers are priced out of the market, leading to a cocky-feeding process of liquidation and falling prices when leveraged investors outset to sell.

Also read:

Crypto-renminbi to challenge U.s. dollar

[1] Many gold ATM machines and settlement mechanisms were installed around the world in the early on 2010s as players were trying to promote the use of golden every bit an culling to fiat money and a medium of exchange for daily transactions. However, they failed because of depression public acceptance and the inconvenience of using gold for transactions. Crypto apps could suffer a like fate, in my view.

[2] See "Mark Cuban: This is What it Would Take for Me to Change My Heed Well-nigh Bitcoin", NECN Money Report, January 12, 2021 https://world wide web.necn.com/news/business/money-report/mark-cuban-this-is-what-information technology-would-take-for-me-to-change-my-mind-most-bitcoin/2387139/

[three] "Legal Aspects of Central Banking company Digital Currency: Fundamental Bank and Budgetary Law Considerations", Imf Working Paper WP/20/254, November 2020.

[4] See "Cathay to Legalize Digital RMB and Prohibit Competitors", Lexology, November 12, 2020, and

"Prc'south New Draft Law Seeks to Legalize Digital Yuan Only Ban Competitors", Coingeek, 29 Oct 2020, and

"Communist china passes cryptography law as gears upwards for digital currency", Reuters, Oct 27, 2019

[five] Come across "Chi on China: The Crypto-Renminbi's Disruption to the Market, Economic Growth and Policy", 5 August 2020.

[6] See Bitcoin Cash Rich List by BITAMP, and also "Bitcoin Whale", Investopedia

Any views expressed here are those of the writer as of the engagement of publication, are based on available information, and are bailiwick to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may become down as well as upwardly and it is possible that investors volition non recover their initial outlay. Past performance is no guarantee for futurity returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, at that place is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economical atmospheric condition).

Some emerging markets offer less security than the majority of international adult markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater chance.