Cryptocurrencies are not Currencies they are Something Else


Back in 2013 when I first started investing in bitcoin and other blockchain projects many people including myself referred to all blockchain projects as cryptocurrencies. However, most blockchain projects that are referred to as cryptocurrencies (including Bitcoin) are not currencies. Most of them perform a terrible job as currencies, even the ones that are actually meant to work as currency such as Bitcoin. An agreed upon definition of currency by most economists is an object that is fungible (all unites of the currency are the same), transferable (can be easily interchanged), can serve as a unit of account (you can price goods and services with it), and serve as a store of value (the price tomorrow relative to everything else will be about the same as today). Unfortunately for most supporters of Bitcoin and other projects as a replacement of national currencies, Bitcoin and most similar projects fail to have all of these four properties of currency. Although Bitcoin and its brethren are fungible and divisible that they can be used as a unit of account they are as volatile as a penny stock, being subject to massive spikes and crashes sometimes simply due to unfounded rumors.

However, that doesn’t mean that all blockchain projects cannot function as currency. There’s a project called Tether which has tethered the price of the USD and EUR to its token by backing it with actual USD and EUR deposits. That project and similar others like Gatehub USD and Bitstamp USD which exist within the Ripple network deserve the term cryptocurrency since they are actually performing the job of currency by fulfilling the requirement of day to day price stability. However, they do not exist as separate from the national currencies they represent, and they are still not completely safe forms of currency as they are very dependent on the credit of the organizations supporting the tokens with USD and EUR funds as has been seen at times when insolvency rumors in the Bitstamp exchange or Tether affect the price of their respective currency tokens. Although the frequency of such rumors is rare and the price volatility of such tokens is small compared to those of Bitcoin and other blockchain projects.

If most cryptocurrencies are not currencies then what are they? It has been noted that the price variation of bitcoin and similar projects is similar to those of commodities. In the commodities world, sudden changes in demand due to weather or geopolitical events significantly affect the price of commodities due to their finite supply. With bitcoin and its brethren sudden changes in demand from speculators is often responsible for the sudden significant changes in prices due to the scarcity ingrained in the algorithm of most of these projects. The proof of speculators being responsible for the sudden spectacular price movements in bitcoin and its brethren can be seen in the fact that average transaction rates in their respective networks have been growing at a steady rate, signifying a steady rate of adoption due to its discovered utility among the people transacting in them, while the actual price has often been spiking multiple 1000% in short periods of time with massive volume and crashing down soon afterwards. Therefore, since bitcoin and its brethren have utility to the people that use it, as is evident by the steady growth of average transaction rates in their respective networks, they can definitely be categorized, just like natural commodities, as assets, as has been the position of the Internal Revenue Service in the United States, that is subject to significant spikes in volatility due to perceived scarcity among speculators.

A better and more important question that is yet to be answered is what kind of asset is Bitcoin and its brethren?