The first cryptocurrency, called Bitcoin, was launched in 2009 by an unknown person or group working under the name Satoshi Nakamoto. The 2007-2009 financial crisis was still unfolding, and the memory of the banking system’s mistakes was painfully fresh in most people’s minds. It’s no surprise that the idea of a decentralised currency soon spread like wildfire. El Salvador even adopted Bitcoin as a legal tender in September 2021 and passed a law giving financial incentives for citizens to use the cryptocurrency in their daily lives. The rise of cryptocurrencies has led to debates over their future role in the financial system, with some even arguing that they could someday replace traditional money. But are cryptocurrencies even money in the first place?
In order to explore this question, we first have to understand what money is. Traditionally, money is considered to have three functions. Firstly, it acts as a medium of exchange, letting people trade goods and services without the need for barter. Secondly, money serves as a unit of account. This means that money provides a standardised measure for the value of goods, which is crucial when it comes to making informed decisions. For example, if I told you that Television A was worth two Berkshire piglets, and Television B was worth 100 packs of Marlboro cigarettes, you probably wouldn’t know which was actually more expensive. If I told you how much each cost in euros, you would have no trouble making the comparison. Lastly, money functions as a store of value. This is also critical, as it makes saving possible.
So, what about cryptocurrencies? If you had a lot of money invested in crypto during 2022, you already know it’s not a good store of value. Also, congratulations on making it through that rough year. In December 2021, the value of one Bitcoin was nearly $50,000. By December 2022, it was worth around $17,000. A good store of value is meant to maintain its value over time, yet people who bought Bitcoin in 2021 could easily have found that the value of their investment had more than halved over just a few excruciating months. Although the price has been climbing back up, cryptocurrencies continue to experience extreme volatility. In contrast, government-issued currencies tend to be more stable. Although traditional money devalues too, the effect of inflation is not nearly as severe, especially as governments generally aim for low, stable inflation rates.
Additionally, it’s worth noting that most cryptocurrencies are inherently volatile. Unlike precious metals like gold and silver, they usually have no inherent worth. Of course, most modern money doesn’t either, but traditional currencies are still not very fluid. This is because traditional currencies are backed up by a government which aims to keep changes in their value relatively low. This is not the case for cryptocurrencies, which derive their value from market demand. Speculation in these markets prevents cryptocurrencies from being reliable stores of value.
Cryptocurrencies also struggle to be good mediums of exchange and units of account. For money to serve as a medium of exchange, it must be widely accepted. While some businesses are starting to accept Bitcoin, most don’t. Estimates show that worldwide just over 15,000 businesses do. For context, there are more than 75,000 businesses in the Spanish restaurant and take-out sector. Some would argue that this is just because crypto hasn’t fully caught on yet. However, the problems seem to be more deeply ingrained than that.
The example of El Salvador is a good way of illustrating this. El Salvador an app to encourage Bitcoin use. It gave out $30 worth of Bitcoin to people who created a wallet through the app to get them started, which led to over half of households downloading it. Only 9.3% kept using Bitcoin through the app after spending the $30. A lot of factors influenced this, including problems using the technology. However, the volatility of cryptocurrencies also makes them impractical for daily use, as the value can fluctuate significantly between the time of the transaction and the settlement. As previously mentioned, storing value in cryptocurrency is also quite risky, giving people incentives to turn Bitcoin payments back into regular currencies once they receive them. This is exactly what 88% of El Salvadoran businesses receiving Bitcoin payments did, highlighting how impractical it is to try to use cryptocurrency as a substitute for money.
Of course, it could be argued that traditional money sometimes faces the same problems as cryptocurrencies. Hyperinflation can obviously stop money from being able to store value. In 2022, Bitcoin’s value approximately halved between January and September. At the peak of Hungary’s hyperinflation crisis in the 40s, prices doubled every 15.6 hours. In other words, the value of Hungary’s currency more than halved every day. Even though crises like these are rare, it could be argued that if we’re still willing to consider Hungary’s pengo as money in the 40s, we must also extend this courtesy to cryptocurrencies.
Arguments like this miss the point. At the end of the day, it doesn’t matter whether we call cryptocurrencies money or not. What matters is that they don’t really perform the functions of money. This is because they’re too volatile to reliably store value, which also makes them less likely to be accepted as a medium of exchange. For now, cryptocurrencies are just volatile financial assets which rarely have inherent value, and they should be treated as such.
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