Are we all a bunch of suckers? Should we be afraid of missing out and stuck in the past?
While I believe that blockchain (the underlying technology used in cryptocurrency) brings great benefits to our economy by increasing trust and transparency (check out what IBM is doing with blockchain), cryptocurrency lacks two of three critical items for success.
Bitcoin.org describes bitcoin as “an innovative payment network and a new kind of money [emphasis added].” If it considers itself to be money, let’s evaluate it as money.
For money to be useful, it should fulfill three functions:
- It should serve as a medium of exchange.
- It should provide a store of value.
- It can be used as a unit of account.
Let’s look at each area starting with the last.
It can be used as a unit of account.
Money can be used as a way of tracking things even without the physical item. For example, my banking statement shows what the bank is “holding” on my behalf. When I use my check or debit card to buy something, the bank immediately reduces my account balance.
This is an area where cryptocurrency does well. The distributed ledger functionality of blockchain is very much like the bank statement but on a much larger (and wider) scale.
It should provide a store of value.
One of the best uses of money is to store purchasing power for the future. For example, a $20 bill can be used to buy food today, tomorrow, or next week.
However, to be truly beneficial that value should be relatively stable. If you can buy five gallons of milk for $20 today but only two gallons next week, then you won’t have confidence in that $20. This is why inflation (particularly hyperinflation) can be so damaging to an economy.
On March 22, 2022, one bitcoin was worth $42,359. One year earlier, it was worth $54,529. In between, it fell to as low as $29,807 and rose as high as $67,567. Imagine having a salary that fluctuated that much in a year!
You probably have a good idea of what kind of meal you can buy with $20. Do you have any idea what you can buy with 0.008 bitcoin? Me neither.
It should serve as medium of exchange.
When most people think of money, this is what they think of. Money allows goods to be exchanged without resorting to the barter system. It solves what is known as the “double coincidence of wants” where trade can only occur when each party has what the other wants.
If I’m selling lemonade at a lemonade stand, I want money instead of say, birdseed. That’s because a) I don’t have birds to feed; and, b) I’m not sure who will want birdseed in the future.
To serve as a medium of exchange, money needs to be readily accepted. Can you use dollars at Amazon? Yes. Can you use bitcoin at Amazon? No. Can you use dollars at Chick-Fil-A? Yes. Can you use bitcoin at Chick-Fil-A? No. Can you use dollars at your local lemonade stand? Sure! Can you use bitcoin? Good luck!
So instead of worrying about missing out with cryptocurrency, you might consider how much easier your life is with the simple, stable, widely-accepted US dollar.