When we talk about a currency, the term itself has a very deep responsibility and I don’t think Bitcoin or cryptocurrencies like bitcoin can play that role not now not ever. In this post I am going to explain why.
What’s a currency!
It is a fancier word for money but with a more specific meaning. In the simplest sense, a currency is a medium of exchange. The most important feature a currency should have is ease in exchange. The ideal currency is something that you can change into goods or services everywhere, all the time and in the simplest way possible. Because of that each currency has to have some features to make it more near to the ideal form. Some of these features include:
- Stability: The value a currency holds in the ideal form should be always the same. This will make exchanging it with goods simpler because this way you will always know how much currency you should pay in exchange for each product or service that you receive.
- Popularity: Currencies must be trusted by everybody. The more people know and trust the currency you use, the easier it will be for you to exchange it. This trust and popularity is built over time and based on how stable that currency was in history.
- Ease in exchange: A currency should be simple to recognize and exchange for everybody. The easier it is to use the more popular it will get.
Why Bitcoin can’t be a real currency
Right now bitcoin doesn’t have any of the three features. It is not stable in value; It is not popular (relative to the population of the world or even a country) and it is not simple to exchange because it needs IT knowledge or familiarity with how cryptocurrencies work.
However, it may be able to overcome the second and third problems. What is not solvable is the first one. As long as the value of cryptocurrencies like bitcoin change so fast, it will not be possible to exchange it with goods. Imagine you want to buy a candy with bitcoin, you would have to go and see the exchange rate and then decide how much to pay. This way markets should change price tags all the time or write prices in dollars and you exchange it into bitcoin as you pay. In that case you are actually paying with dollars but in the form of bitcoin (you can do that with anything).
Why should currencies be centralized
The amount of goods produced and services provided are changing all the time; We don’t see that but the economists do. Imagine a system with six people (you and five customers) .You are producing candy and you price them at 1 dollar each (based on how much they cost you to produce). You now produce 10 candies. Each one of those people needs 2 candies. Here, even though they want the candies, because they don’t have enough money they can’t buy them. They will have to buy only five and you will end up with 5 extra candies that although people want they can’t buy. What you will have to do is to bring down the price to $0.5 just because there was not enough money in the circulation.
This will cause negative inflation which against common opinion is not good at all. Negative inflation can hurt manufacturers badly so governments do everything in their power to prevent it. In the example above in a centralized system, the central bank would print 5 more dollars and inject them in your small economy (usually not very fairly) but now instead of 5 dollars in circulation there will be 10 dollars and you can sell all of your products with the price you had in mind and without loss.
The opposite is also true, when there is not enough product in an economy and too much currency, the central bank will try to collect some money from the economy to prevent too much positive inflation (which can hurt those who keep their assets as currency). The reason why in developed countries the inflation is low and stable is continual observation and intervention of central banks.
In the absence of a centralized system it is almost impossible to keep the value of a currency stable because the amount of goods is always changing. This is the case with Bitcoin and many other cryptocurrencies. Their value changes constantly and very dramatically. Imagine buying a car with bitcoin and watching its value skyrocket the next day (it’s a loss for you and a win for the seller).
So if Bitcoin is not a real currency what is it?
It is a means of investment like stocks. Right now people don’t buy bitcoin to exchange it with goods; They buy and keep it because they believe the value will go up. The way bitcoin works now, there is no way it can become a common currency. Just because its value went up doesn’t mean it was successful in becoming a currency. Even if Bitcoin is used for some money exchanges we can’t call it a currency. During the second WW paintings and art pieces had the same role but we never called them a currency.
It is important to mention that the fact that Bitcoin is not a real currency doesn’t mean that is will lose value. It can have value as long as people keep buying it but don’t expect to pay for your ice cream in Bitcoin anytime soon.