Do Higher Prices Make Crypto-Assets Crypto-Currencies?

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There has been a surge of interest and activity in the what have been dubbed crypto-currencies.  According to the Economist, the market cap for this space is around $60 bln, and a founder of the one of the crypto-to-crypto exchange estimates daily turnover is as much as $2 bln.  

Some of the price action is breath-taking.  The most well-known are the Bitcoin.  The price surged 140% last year and is up nearly as much already this year.  The Bitcoin accounts for around half of the market cap for crypto-currencies and acts as the numeraire for others that are linked to it.  

The Bitcoin’s appreciation has percolated into the mainstream media, but it is not the only one that appreciated dramatically.  Ripple, for example, began the month with a market cap of around $2 bln.  It was recently at $13 bln.  Ethereum was worth about $700 mln in January and recently was valued at more than $8.5 bln.

There are several factors that may have spurred renewed interest in this space.  Geopolitical uncertainty is running high.  The seemingly unpredictable US President, who antagonized friends and foes, is escalating the long-simmering confrontation with North Korea, has dropped the largest non-nuclear bomb in Afghanistan, and launched a missile strike on Syria for its alleged use of chemical weapons.    European politics were perceived to be a grave risk.  Chinese capital controls may have encouraged some interest in crypto-currencies as a means to circumvent the restrictions.     The recent cyber-attacked demanded Bitcoins as payment (and some reports suggested at least $80k of bitcoins were paid).  Also, recently demand from Japan followed the inclusion of the Bitcoin under the country’s regulatory framework.

Despite the increased activity and surging prices, the crypto-currencies are currencies in name only.  There remains a fundamental contradiction at the heart of crypto-currencies.  If they are an alternative to fiat currencies (though they are also typically not backed by gold or silver either), then they should be hoarded as a store of value.  However, if they are hoarded, they cannot develop the critical mass of networking to fulfill the other functions of money (means of exchange).

The volatility also does not lend itself to being a store of value (another agreed upon the function of money).  Consider that it is not unusual in recent days for the price of the Bitcoin to change by 2%-3% a day.  The US dollar, in contrast, rarely moves one percent day, and while the Bitcoin has appreciated by nearly 50% over the past month, the Dollar Index has fallen 2.3%.


Crypto-currencies appear ease to buy, but are more difficult to liquidate
.  Reports suggest that even modest amounts take days to complete.  It appears that a small part of the float actually trades, and the supply is limited.  There are around 16.3 mln Bitcoins and 1800 new ones a day.

The rising price for crypto-currencies and new interest does not alter our assessment.  These are not currencies in any meaningful sense.  To the extent that some retailers accept them is a bit of a novelty and marketing fluke.  Some of the larger businesses, like Virgin, who previously indicated a willingness to accept Bitcoins as payment, reportedly convert such payments into hard currencies.  It is a gimmick, not confirmation of its currency status.

Leaving aside the questions of the origin of money, money, under conditions of modernity facilitates exchange, and is used to pay taxes and settle debts.   When crypto-currencies can be used to pay taxes, and/or are generally accepted to retire debt, then their money status needs to be reviewed.  Under present condition, none of the functions of money are met by crypto-currencies.  They are hardly used as a means of payment.  They are poor stores of value.  They are not units of account.

People can still make and lose money trading them.  They are part of the universe of paper assets, with their own niche rules governing supply.  One can use some crypto-currencies to conceal transactions, but do not expect the taxman, the landlord or grocer to accept them anytime soon.    They are currencies to the extent that contacts on Facebook are friends and the “grande” means medium size at Starbucks.