“To the moon! Revolutionizing Fiat Money!“, or so they say. Bitcoin and Cryptocurrencies as a whole are polarizing topics. People are still divided on the issue of Bitcoin and Cryptocurrencies being a valid currency already; or just a regular asset like stock options and investing in gold and silver are.
In fact, the main drive for investing in cryptocurrency seems to be the perceived ability of “becoming rich quick” (which in and on itself is always something to be wary about). This should be made clear by the almost envy educing thought of behind ahead of your time in 2013, investing a couple of hundred dollars and hours into mining and buying Bitcoin and thus becoming a millionaire in 2021 as Bitcoin peaks at $40000 in January 2021.
This raises a couple of questions! Not only, whether you would have actually had invested in Bitcoin back then if someone told you, but also if you would have “hodl’d” (held the asset on long-term basis) to this exact date. It seems rather likely you would have sold it after Bitcoin reached the first $1000 or even $10000 mark, wouldn’t it? Loosing out on the additional four-times increase it reached in January, regretting your choices nonetheless.
Apart from that, additionally, this begs the question whether Bitcoin (and cryptocurrencies in general) can be considered a form of currency or asset as of the current date. Are Bitcoin (and other cryptocurrencies) bought and acquired so they can be exchanged for goods and services, as a means of payment, or instead bought to speculate on their increase in value over time? Are they, like gold and silver, bought because they have a (perceived) innate value in them that makes them just as valuable for other people, or instead just a means to trade?
What makes a “currency” a currency?
Simple “Economics 101” that differentiate an asset from a currency is, what Bitcoin is currently lacking, its widespread acceptance and stability of value (“Wertstabilität”).
Primarily, a currency can be defined as a currency when its value is stable (can be relied upon not loosing its value the next day, see: hyperinflation), is widely accepted as a means of trade and exchange, and can be used in an abstract way to equate goods and services with a numerical trade value. Additionally it can be used to “store purchasing power”, but so can an asset. You could even pay some people in stock options — but is this option really widely accepted that would classify them as a currency? I doubt it.
Problems arising with Bitcoin and Cryptocurrencies
A piece of cake might be equated to $2 at your local bakery, it could also be equated as 0.000054 Bitcoin. A new car could be equated to $20000 or 0.54 Bitcoin. If your bakery or local car dealer would accept Bitcoin as a means of payment, you could most certainly pay your goods with said Bitcoin. But they don’t accept it. Why is that?
Longevity and Stability
Businesses need to operate long term. Bitcoin (and other cryptocurrencies) are highly volatile. Nobody can assure Mr. Caker Baker that his 0.0054 Bitcoin earned on $200 of cake sales in January will still be $200 at the end of the year. Not even at the end of the week. It adds a high level of uncertainty which inevitably would result in any regular businessman accepting cryptocurrencies into trading them to regular, widely-accepted currency as soon as receiving them.
Some might mock my claim with “Yeah, I’ll accept Gold as soon as I can buy my groceries with it.” Those people confuse “asset” with “currency”. Regular gold bars are a perfect asset but not the best currency. If the bakery or car dealer have a demand for securing (physical) assets, they would and could still invest in Gold or Bitcoin. But no sane businessmen would make all their deals relying on Bitcoin alone, simply because Bitcoin has dropped and will drop once again for a week or maybe months drastically before going up again in value.
A business needs to pay regular bills, pay employees and acquire more customers with potentially costly advertising. A drop in their financial assets by 50% or more from one month to the next could mean bankruptcy. Simply not feasible.
Taxes — I mean: Fees
Next to the lacking longevity in Bitcoin and cryptocurrencies, a lot of people on the “Anti-Fiat-Side” (who are opposed to regular book money we all call Dollar, Pound and Euro) argue that the widespread implementation of cryptocurrencies are hindered because of the taxes and uncertainties imposed by the state legislature. I’d agree to some extent.
However, the state demands a tax. No matter what you earn. But, what most people seem to forget (and which always comes up as soon as Bitcoin skyrockets (“moons”) once again) is the innate fees that are additionally imposed by the cryptocurrency blockchains. “Miners”, those that play the role of the bank “approving” or “confirming” the transactions, demand a pay for their computing power and electricity. This pay increases with increasing blockchain demand, as it is typical in capitalist economy. A transaction, translated to regular currency we all know, is not limited in how expensive it is. Both January 2021 as well as December 2017 saw single transaction costs of about about $5 to $10, if you wanted your payment to be processed within two hours. The fees are depending on how fast you want your transaction to be processed. (If you go too low in the fee, the transaction might be rejected fully.)
It simply is not feasible for customers of small stores and comparatively low purchasing values to pay double the price solely to cover the transaction fees. Buying a single coffee for $4 instead of $2 because you had to pay in Bitcoin? I’d argue: It’s not worth it, for nobody.
This applies to Bitcoin. Other “Blockchain Cryptocurrencies” have differing fees, some have none. So, if a cryptocurrency were adopted as currency and not as asset, they’d need to have a miniscule to non-existent fee. If you’re asking me, just like paying with “fiat money” costs you basically nothing.
Clairvoyance and Cryptocurrencies
To really excel in the cryptocurrency market, you need absolute clairvoyance. Whereas with stock options, “time in the market beats timing the market”, usually, when talking about long-term investments (compared to crypto “hodling”). There’s absolutely no guarantee that a cryptocurrency will gain in value over time simply because it exists.
The main driver of “cryptocurrencies” is not the currency aspect of them but instead the fact that they’re traded with and against other currencies on trading platforms. Therefore, they’re no more and no less than another extent of the already existing and typical “day-trading” quite a few people do. Instead of regular Forex trading and CFD trading, crypto-traders are using a different means, a different asset. Whether you’re going short or long in a stock, a regular fiat money, Bitcoin or any other cryptocurrency does not matter. You are trading assets, not currencies, in that moment. You are speculating on a future perceived wealth something might have. No more, no less. You may win money, you may loose money.
Does this make it a currency “to revolutionize all other currencies”, “make the Dollar and Euro crumble” or “replace all fiat money now”? No, absolutely not. And it’s beyond my understanding as to why people would believe such things.
My Personal Bitcoin Advice
I am neither a financial advisor nor a “crypto guru”, but instead I’m a computer scientist and photographer with some experience in the Bitcoin investment and cryptocurrency market. If you really want to invest money into the volatile crypto-market, be aware of the risks. Do not dump all your life-savings into one coin because someone told you it would “go to the moon” soon. You will not get rich quick. You, probably, will not “beat the market”.
Cryptocurrencies are assets and will stay assets. They will not bring about a revolution anytime soon. Not in the next ten years. They’re an acceptable asset with a high-risk factor to it, but they do not suffice as a widely adoptable currency. However, just like with stock options, you can multiply your wealth substantially, if you’re lucky. If you’re unlucky, you could loose everything. That’s the risk you’re taking, with cryptocurrency investment even more so, which makes it completely unfeasible as a regular alternative to fiat money.
Stay with the things you know about, especially in terms of investing, and only invest what you’re ready to lose anyway. Anything else is just delusional.