There are approximately 1,500 different cryptocurrencies on the market right now for trading with a combined market capitalization of $560 billion. BTC makes up a large portion of that value, about 35%. The problem with labeling cryptos as Currencies is that they are not actually currencies in the traditional sense. They function more like digital assets for people to trade. The commercial utility to use Bitcoin as a medium of exchange for goods and services isn’t practical on a large scale. Today the vast majority of BTC being exchanged is for speculation purposes. It’s the greater fool concept that it doesn’t matter if I pay more for something because someone else will eventually pay me even more to buy it. This only lasts as long as people can afford to dump money in.
Already Bitcoin has fallen about 40% from its peak back in December of 2017. Its price crashed from nearly $20,000 to around $10,000 in the span of a month. It’s bounced back a little bit and is currently hovering around $11,500. This means that people who have mortgaged their homes and borrowed money on credit cards to buy BTC late last year would be deeply in the red right now.
Generally speaking currencies have to exhibit certain characteristics to be widely accepted as a medium of exchange. Often is has to be easily understood by the general population. But blockchain technology and cryptocurrencies are still a relatively new concept in the world compared to fiat money and hard commodities. People are often confused by what bitcoin is and how it works. Even if a person understands what a bitcoin is and the history behind it, they will often still not know how they can confidently buy it without being scammed.
A currency also has to be generally accepted and used, but this is not the case with bitcoin. Most companies don’t accept cryptocurrencies. And even if they do most of their customers won’t see bitcoin as a practical way to pay for groceries and gas if their country’s native currency is relatively stable. Bitcoin holders don’t want to buy pizza with their bitcoins.
Another issue is that currencies should have low overhead costs when transacting. But bitcoin is very expensive to transact with. There are updates now with the lightning network, but that involves certain trade offs that not everyone will agree is worth it.
The last problem is that currencies should be a trustworthy store of value. But as of now, putting money into any cryptocurrency is a gamble. The price could move up or down 10% within a single. If I had $100 in 2008, it would be worth about $85 today due to the effects of inflation slowly eating away at the purchasing power of the dollar. But at least it’s a slow and somewhat predictable decay over a long period of time. You can assume what will happen to the value of your money if you hold it for 5 years. But there is no way to tell what bitcoin’s value will be 5 years from now. Cryptocurrencies have no assurances. This is why everyone still values goods and services with dollars, and not bitcoins. If an appliance store advertises a dishwasher for 0.25BTC nobody would understand how that’s valued. Its perceived value could change a lot from one day to the next because of how volatile BTC is. But if the dishwasher has a price tag of $2,500 then everyone would know exactly how much that’s worth. Maybe Bitcoin will become a currency someday, but right now none of the cryptocurrencies can be taken seriously as currencies. They are simply financial assets that only exist in digital form.
The post Why Bitcoin is Not a Real Currency appeared first on Modest Money.
This post first appeared on Modest Money Investing News And Personal Finance B, please read the originial post: here