The fallacy of crypto as an alternative to fiat currency

First, the argument that Bitcoin’s popularity signifies its legitimacy overlooks a crucial distinction between collectibles and currencies. Humans have always assigned value to various eclectic goods, from flip books to soda bottle caps, but these items serve as memorabilia, not mediums of exchange. The fact that people trade them for huge sums of money demonstrates a penchant for acquiring perceived assets, not a validation of their utility as currencies.

Further, the advocacy of crypto tokens as currency disregards its anti-sovereign stance and the risks it poses to fiscal and monetary systems. It has already failed its test as digital money, given its poor performance as a medium of exchange and store of value. It has proven too volatile for that; speculative swings have resulted in significant losses for investors. In May 2021, for example, cryptos lost nearly $1 trillion in estimated market value. Instability undermines the utility of cryptos in facilitating everyday transactions and preserving wealth over time. Any currency or asset class must address these fundamental challenges and demonstrate structural robustness to fulfil its intended purpose effectively.

Bitcoin emerged right after the Global Financial Crisis (GFC), created by an unidentified individual or group, as a means to conduct transactions without the need of a trusted third-party like a central bank or financial institution. It was well timed, as the GFC had eroded trust in traditional banking systems and governmental authorities. The allure of Bitcoin amid widespread disillusionment with the status quo highlights a common human tendency to gravitate towards alternatives that offer a counter-narrative, often without critical examination or consideration of potential consequences.

Today, the infirmities of Bitcoin are clear. For example, its fixed supply model, while aimed against inflation, creates its own set of economic challenges. Unlike traditional currencies, Bitcoin lacks elasticity in its supply, making it inherently deflationary. As noted by economist Nouriel Roubini, Bitcoin’s deflationary nature undermines its utility as a medium of exchange, as individuals are incentivised to hoard rather than spend it, which leads to economic stagnation. Nobel laureate Joseph Stiglitz has highlighted Bitcoin’s speculative nature, noting its susceptibility to bubbles and crashes. Additionally, Bitcoin’s reliance on energy-intensive mining processes goes against our sustainability goals and worsens environmental concerns. Therefore, while Bitcoin may hold ideological appeal as a challenge to centralized monetary systems, its practical shortcomings render it an impractical solution to economic challenges.

The notion that Bitcoin serves as a remedy to currency debasement overlooks its inherent limitations and risks. It is understandable that individuals in countries like the US, with high recent levels of currency printing, may be concerned about the true value of their money. But that does not make Bitcoin the answer. Its reliance on artificial scarcity through cryptographic algorithms does not address the underlying issues of economic stability and growth. Instead, it introduces new uncertainties and complexities into the financial system. So while Bitcoin may draw attention to the problem of currency debasement, it is not a sustainable economic idea.

The argument of scarcity value induced by Bitcoin’s periodic halving of new tokens ignores the complex realities of our modern world. In a society where poverty-porn and exploitation coexist with the monetization of human data through social media platforms, the notion of scarcity alone does not suffice to justify Bitcoin’s appeal. Additionally, the echo chamber of Bitcoin zeal is often fuelled by a romanticized perception of it being anti-government or anti-officialdom. This is rebel-heroism rather than genuine social evolution and the rebellious sentiment could lead individuals to invest in what amounts to a ‘ticket to nowhere’ simply because others are already in queue to buy that ticket, without considering its long-term impact. Thus, while scarcity may indeed drive investor interest, it is not a sufficient rationale for legitimizing Bitcoin’s role as ‘digital gold.’

The analogy of crypto acting like an AI-run currency is an oversimplification. While it’s true that humans often struggle to agree on various issues, including monetary policy, the solution isn’t to relinquish control to non-human entities. Instead, it’s about fostering informed debate, implementing sound economic principles and ensuring accountability for decisions.

Cryptocurrencies represent a challenge to the traditional state monopoly over currency issuance and management. By operating independently, cryptos constrain the ability of authorities to regulate and stabilize monetary systems. As these digital tokens gain global traction, it’s imperative for governments to establish regulatory frameworks against illicit activities such as money laundering and tax evasion, while preserving the integrity of monetary systems. Authorities must prioritize financial stability over the speculative interests of cryptocurrency enthusiasts.