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.