For many years there have been a lot of hype around cryptocurrency and for good reason. It is an interesting technology, with a lot of potential to change how people interact with the financial market. It is not the technology that interests people, but it has rather gain mass fame as an investment product.
In the 2010s it was a niche market with Bitcoin sitting at under €400 in 2016 to one Bitcoin being worth over €75,000 at the time of writing. With many seeing it as like a currency that will replace the U.S. Dollar or that it is similar to gold. Many say that it is just like normal currency, in that there is nothing backing it and its value is what people attribute to it.
I think neither is the case.
Let’s start off with it being like a normal currency or something that will replace traditional currencies. To put it simply, crypto is too volatile to be a currency. The price of many cryptocurrencies goes up and down sometimes by hundreds of Euros a day, trying to set prices with a currency like that would be very difficult.
There is a reason why most transactions, debts, contracts are priced in USD or Euro. The primary one being these currencies are normally quite stable and don’t massively go up or down in value. This gives certainty and stability to markets, as a seller or consumer can buy a product knowing that they are not going to go massively up or down in price.
An example of this was the video games platform Steam. For a while you could buy games on Steam using cryptocurrency, but they had to stop using it as content creators could not set prices as they would need to be changed daily in order to react to market fluctuations in the price of cryptocurrency.
Whereas a government can print more money to lower the value of their currency or can use foreign reserves to boost the value of the national currency. Cryptocurrencies cannot do either of these unless the cryptocurrency is being managed.
Gold or silver
Many people have pointed out that many cryptocurrencies have a thing in common with gold and that is limited supply. Some cryptocurrencies can only have a certain amount in circulation at a time or there is a limit on the total amount that can be mined. While this is true, there is another reason why cryptocurrencies are not like gold and cannot replace gold.
The main reason is that gold is not just a store of value, it can be used for many different things. While most associate gold with jewellery, it has many different uses as well. For example, gold is used a lot in computers and is used quite a lot in the aerospace industry. You cannot build much with cryptocurrencies.