Education

Bitcoin is NOT a Currency

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We are in a global monetary system dominated by fiat money, currencies that are not backed by gold or any other asset but by public trust. Its value is by fiat decree only, the issuer simply decrees that the currency has value.

This means that the government and the central bank can massively increase the money supply, printing money without major worries. This is the process that we are seeing in many central banks with the development of quantitative easing programs, granting the issuer the power to do as he pleases without any real monetary discipline.

As a result of this situation, in recent years there have been so-called cryptocurrencies that are not at the mercy of central banks and whose maximum referent is Bitcoin. But can we consider that Bitcoin is a currency? What characteristics should a currency offer?

Is Bitcoin a deposit of value?

A currency must provide the ability to preserve the value of the income we obtain in the market so that it can be saved or consumed through the acquisition of goods and services. Consequently, a currency must give us a high degree of security to deposit the value of our income.

Therefore, a currency, in a world trade environment, must offer a degree of volatility that is low or as low as possible, otherwise it hinders the transactions of goods and services and is discriminated against by other currencies that offer a degree of volatility. Greater certainty.

To analyze the risk of a financial asset, we must observe the daily volatility. Volatility is a statistical measure that examines the dispersion of the returns of a value and can be measured by calculating the standard deviation or by the variance (square of the standard deviation).

 

Can we plan our obligations in the short term with a financial asset with the daily volatility of bitcoin? Clearly not. An asset with this type of volatility does not grant the public the function of deposit value.

Is Bitcoin a means of generalized exchange?

In recent years, we have seen how Bitcoin is accepted by a growing number of businesses, which could lead us to believe that it is a coin. However, the reluctance is growing for the use of Bitcoin and the different cryptocurrencies. These reluctances are linked to the deposit value function that we have commented on previously.
When we go to a restaurant, both the diner and the innkeeper expect the asset value in which the prices are fixed to remain stable and from there the agreement between the parties is born.

The diner and the innkeeper would be accepting the deal with an asset 15 times more risky than the dollar. This factor prevents the large part of businesses from accepting Bitcoin and, therefore, is a means of generalized exchange.

Bitcoin offers a greater number of advantages in terms of security. However, this is not enough, given that it is not a security deposit, large banking entities request a guarantee of value if they wish to carry out international transactions with bitcoins.

The lack of guarantee in its value is the handicap to be a means of generalized exchange. With the daily volatility we have seen, it offers no security whatsoever for both trade and business planning. That does not mean that Bitcoin can not be considered as currency in the future, but today, with the data present, it is not.

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