Are Cryptocurrencies really the Future of Money?
Economists don’t often view cryptocurrencies as ‘real’ money, instead they’re considered crypto-assets as they’re mainly used for speculation on value and not as a means of exchange, store of value or unit of account. For an asset to be considered money, it must perform these three basic functions, and no currently available cryptocurrency performs any of these.
Some cryptocurrencies are used as a medium of exchange, though most crypto-transactions occur between speculators and are not accepted as a method of payment in the wider economy, whether on the high street or in online transactions. Alarmingly, the black market is the only major marketplace in which cryptocurrencies are an accepted medium of exchange, thanks to its strong purchasing power and untraceable origin.
Acting as a store of value is the second key function of money, though considering the substantial volatility of Bitcoin, Litecoin, Ripple and other cryptocurrencies, the likelihood of the value remaining stable is highly unlikely, making cryptocurrencies an unreliable store of value.
Performing as a unit of account, or as a price comparison tool, is the last major function of money and one that cryptocurrencies clearly fail to achieve. Whenever cryptocurrencies are used in price comparison they are always indexed to an official national or regional currency, with there being very few examples of prices labelling in a cryptocurrency.
Whilst cryptocurrencies aren’t regarded as money, being mainly held for speculation, in order for them to become money there are many things that would have to change. To begin with, vendors would need to become willing to accept cryptocurrencies as a means of exchange, if the network of businesses willing to do so was large enough, the function of cryptocurrencies as a means of exchange would be fulfilled.
In order for a cryptocurrency to be able to perform the two last remaining functions of money there is something that would drastically have to change: the volatility associated with cryptocurrencies. To become a unit of account and a store of value, cryptocurrencies would need to become stable or at the very least more predictable. Obvious to anyone able to understand the volatility of data, the crypto market is incredibly unstable and prone to drastic fluctuation, affecting the ability of cryptocurrencies to store value and maintain a stable level of pricing. Heavy speculation in crypto-markets would need to cease for the volatility to end.
The reality remains that cryptocurrencies have to become widely accepted as a means of exchange and the value they contain has to remain stable over time. Until such an e-coin appears, cryptocurrencies will continue to be addressed as just another financial asset, not as a plausible rival to the official fiat currencies around the world.
Cryptocurrencies, in order to become widely regarded as money, requires widespread acceptance as a medium of exchange. Since the current trend for cryptocurrencies is to continue to be used for speculation, it’s not likely that any cryptocurrency will gain the credibility necessary to become money any time soon. It remains to be seen if a cryptocurrency will ever emerge that is able to perform any, if not all, of the functions of money.
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