If you answer this question from the perspective of today’s trends, the answer is unequivocal – it can’t. But bitcoin has its own fans, who will not hesitate to resent such uncompromising skepticism. Besides, short answers always put you off, and you want to continue the conversation. Some need clarification, some need proof, some need hope – what if there is a chance? They really want to reassure – of course there is!
So how can two such opposite answers be combined?
We call bitcoin a cryptocurrency. The currency root “coin” is firmly ingrained in our minds. But, on the other hand, most of those who make transactions with cryptocurrency and strive to possess it, learning the tricks of mining, see bitcoin as a value that grows in value. That’s what they call an asset. So, in order to imagine a plausible future for a cryptocurrency like bitcoin, we have to make up our minds: is it money or is it an asset? Of course, this opposition is partly artificial, because one of the functions of money is to serve as a means of accumulation. Money made of precious metals became real treasures, and today’s money also represents the world’s wealth, it measures accumulated assets, and it is traded on exchanges. Any currency becomes an asset when it has certain properties that allow a person to protect their savings.
Does cryptocurrency have the qualifying attributes of an asset? So far, there is only one sign – it is steadily growing in price (or rather, steadily growing). Since December 2017, the bitcoin price has been experiencing quite serious declines and encouraging attempts at growth. These fluctuations bring bitcoin closer to “speculative” assets. But “classic” speculative assets fluctuate in price because they involve risk, high returns are expected on them, the companies that issue them earn significant and quick profits, expand their operations, produce products or provide services with high end demand. Investors are evaluating all of this and the market is looking to find a “fair” price for such assets.
And why is bitcoin rising in value? Simply because it is growing! There is a theory that its quantity, like gold, is limited. But gold is not only growing in value because it is rare. It also has a commodity value, not to mention that it is still a “reserve asset. And bitcoin has no commodity or use value. Maybe its value is in the fact that it is a future currency with which everything can be bought someday. That is why we must hurry now to stock up on tomorrow’s universal means of payment.
If the version has the right to life, let us ask ourselves another question: does bitcoin have the signs of a future currency? On the one hand, the number of electronic wallets and accumulated amounts in cryptocurrency is growing, and more and more “cryptomats” – machines that can convert accumulated bitcoins into cash are being installed. However, cashed cryptocurrency immediately becomes traditional dollars, euros and yen. From time to time it is reported that bitcoins were involved in a particular transaction as a means of payment. Someone was the first to buy a pizza, somewhere managed to buy real estate. There are those who proudly look at T-shirts hanging in their closet, for which so much bitcoins were paid that today they could buy a new luxury limousine or maybe their whole garage with them. But these are all exotic cases.
The reality is much more prosaic: the owners of 99% of all bitcoin wallets possess, on average, only 10 bitcoins or less. At the same time, 56% keep less than 0.001 bitcoins in their wallets, which equals $8-9 in value. The average “thickness” of nearly 15 million wallets is $1.5!!! And the average value of cryptocurrency accumulated on one of all 26.4 million wallets is about $5,500. The concentration of bitcoins is very high. Owners of just 2 wallets own $2.8 billion worth of bitcoins, while owners of 148,000 wallets (0.56%) own $127.1 billion (87% of their entire accumulated market value). These calculations are made at a value of about $8,700 per bitcoin. Their market value may change, but the level of concentration is unlikely to be elastic to fluctuations in the conjuncture.
Conventional wealth is also highly concentrated. According to recent data, 1% of the world’s population owns almost 90% of all assets. But these are assets: stocks, bonds, precious metals, real estate, cash. If we talk about money, the means of payment that are not embodied in assets, their concentration is much lower. For example, in the United States, according to surveys, Americans with an average income of $50,000 to $75,000 a year (the median income in the United States is about $55,000 a year) are among the most cash-hungry and cash-paying individuals. The average amount of cash they have is $113. These cash lovers in the U.S. are 8% of the population. Those who keep cash just in case are 26%. Their average income is $25,000 to $50,000 a year, and the average amount of daily cash in a wallet is $64. Notably, Americans who have no daily cash at all and pay wherever they can, mostly with credit or debit cards, are 13%. Their average income is lowest, less than $25,000 a year.
These figures suggest that the ownership and use of cash in the largest financial economy in the world is still fairly distributed, one might even say democratic. And this is quite understandable: the nature of money as a means of payment rules out its high concentration, which is tantamount to removing cash from the economic turnover. If cash is, as they say, thesaurus, it means that there must immediately appear money surrogates, new means of payment. No one has cancelled the law that bad money replaces good money. But the main thing is not even this. It is the fact that the value of assets, for example, in dollars, significantly exceeds the value of cash or equivalent means of payment in circulation – the money supply. There is literally an Everest of financial assets looming over the pile of cash. There is no such mass of bitcoin assets around bitcoin. Not because bitcoin is not embedded in the system of economic activity, but because it is not money per se. It is still the embryo of likely future cryptocurrencies.
Another deterrent is sharp fluctuations in price. Let’s imagine that the value of some currency changes dramatically in value. How would its rational holder behave? If the currency is getting cheaper, he will try to spend it as quickly as possible and turn it into goods and the goods or services he needs. After all, if he hesitates, he loses. As the value of the currency falls, he has to give more and more of it for a good or service. A decline in the value of currency provokes him to spend it. And if the currency is rising sharply in value, its owner will restrain his spending and save. If he continues to spend, he, again, will incur losses, because he will keep the money and buy more goods with the same amount of currency after a while. The appreciation of currency contributes to its accumulation.
Now let’s look at bitcoin, which has no pronounced signs of assets, primarily such as expected income based on economic activity, does not yet create the bitcoin assets that will follow it in the blockchain space. The signs of currency in it are barely discernible. At the same time, it has the characteristics that prevent it from being a currency – a high concentration of ownership and sharp fluctuations in price.
So what might determine bitcoin’s chances of taking a full-fledged place on the list of currencies?
First. There should be a demarcation of today’s cryptocurrencies into potential currencies and crypto-assets, which primarily become tokens issued during ICOs. Initial public offerings of crypto-assets should gradually acquire the features of initial public offerings of securities and financial instruments. Naturally, not in form but in content. If today, by placing tokens, issuers expect that they will grow in value like any other cryptocurrency, which, in fact, attracts investors, then in the future they will have to think about paying their investors a regular remuneration from the income from specific activities. An ICO is a form of crowdfunding and often involves doing business. That is, the token should become inherently a crypto-action or crypto-bond, with all the characteristics of the classic samples of these financial instruments, primarily the income paid out under certain conditions.
Second. Cryptocurrency should gradually spread to more owners. But not only that, there must be appropriate banking services (cryptobanking). It was banks that broke the monopoly of gold as money, replacing it with credit money. Cryptocurrency credit money is what will expand the circulation of cryptocurrency as such. Without the formation of a crypto-financial infrastructure, even a virtual one, there will be no cryptocurrency. It will not overcome the purely technological limitations of bitcoins, but it will create bitcoin assets that will multiply as exponentially as financial assets multiplied on the basis of even gold money circulation. In the Middle Ages, banks did not create gold – they multiplied liabilities, often severely detached from the stock of real gold in their vaults. This caused crises and crashes, but that’s how the modern financial system came about.
Third. The value of cryptocurrency must stabilize. Of course, it will change as existing currencies change, but it can’t be percentages, much less times. In fact, it doesn’t matter how much bitcoin will be worth, as long as its price fluctuations become close to the fluctuations of classic world currencies. Demand for bitcoin as a means of payment and investment, for example, will drive its value up. Reduced volatility will scare off speculators. Somewhere the market will find a balance.
Fourth. No matter how we call cryptocurrency private money, we can’t do without some kind of regulation system. Circulation of cryptocurrency should be subject to rules. Whether it will become a monopoly of the state or some kind of self-regulating system of private money, it is difficult to predict now. The latter option will be very aggressively accepted by state banks, and the first, by and large, makes no sense, because even today national currencies begin life as records in the accounts of central banks and state treasuries. And the current conventional currency is in a sense “crypto.”
Fifth. Cryptocurrency must be believed in – not only in the dark corners of the Internet, but also by the general population. It must integrate into objective, legal economic activity. That means it must begin to supplant conventional means of payment. What will happen to the accumulated debts in society, to the reserves? So far, two extremes are being drawn. One – the complete destruction of the existing economic and financial system with the state at the head. The second – the transformation of private cryptocurrencies into an element of a vertical hierarchical economic system, closing in on the state in its new, unknown to us today format. Now we have not even reached this crossroads yet.
If all this, at least, is realized, it is quite possible that bitcoin or other cryptocurrency will eventually become the currency of the future.