Cryptocurrencies are Speculative Assets, Nothing More

By Angela Gladkikh

Presenting evolutionary implications, blockchain technology has enabled the rise of cryptocurrencies, such as Bitcoin and Ethereum. Despite their promise to secure transactions and reduce payment costs, cryptocurrencies remain speculative assets at best.

An asset at best, cryptocurrency cannot be fully classified as money due to its contradictory characteristics. By definition, money has three main functions — store of value, unit of account, and medium of exchange. An unreliable unit of account, bitcoin’s U.S. dollar value varies daily anywhere from -31% to +42% since 2012. Consequently, its relative volatility prevents massive user expansion, with bitcoin accounting for merely 70 thousand daily transactions as opposed to more than 500 million daily noncash transactions in the United States alone. Although cryptocurrencies act as mediums of exchange in theory, their practical applications remain doubtful as long as prices of goods and services are constantly adjusted to their unpredictable prices.

Unlike national currencies, private digital currencies like bitcoin lack a policy lever that is particularly critical during downturns. The creation of the Federal Reserve System in 1913 stemmed from the need for a centralized institution to deal with banking crises and economic recessions. Public as well as private players are experimenting with fintech innovations to issue their own cryptocurrencies. For example, Bank of England announced the possibility for central bank-issued digital currency in 2012 and is currently researching its potential implications for monetary policy and financial stability. Reacting to immediate client demand, Morgan Stanley, among other top U.S. banks, plans to offer bitcoin swap trading while Goldman Sachs decided to abandon its bitcoin trading plans in the face of an uncertain regulatory framework.

Without a monetary policy in place, private digital assets will continue to face regulatory scrutiny while central bank cryptocurrencies, if issued, hold the greatest promise to act as digital money. Yet, fulfilling the trust component of money, central banks would eliminate the anonymity feature prized by crypto-evangelists.