In an August 30 article with the subdued headline, “Bitcoin and other cryptocurrencies are useless,” The Economist laid waste to several articles of faith within cryptocurrency communities. After noting the “speculative mania” associated with the extreme fluctuations in Bitcoin prices, it commented, with asperity, that Bitcoin users “must wrestle with complicated software and give up all the consumer protections they are used to. Few vendors accept it. Security is poor. Other cryptocurrencies are used even less.” It went on to explain why cryptocurrencies “have fallen far short of their ambitious goals”:
Economists define a currency as something that can be at once a medium of exchange, a store of value and a unit of account. Lack of adoption and loads of volatility mean that cryptocurrencies satisfy none of those criteria. That does not mean they are going to go away (though scrutiny from regulators concerned about the fraud and sharp practice that is rife in the industry may dampen excitement in future). But as things stand there is little reason to think that cryptocurrencies will remain more than an overcomplicated, untrustworthy casino.
The article also was largely dismissive of blockchain technology, calling blockchains “overhyped” and asserting that “[b]lockchain advocates have yet to prove that the underlying technology can live up to the grand claims made for it.”
If one looks past the archness that pervades the article, its central criticisms of cryptocurrencies are well-founded. Even the best-known of cryptocurrencies, Bitcoin, remains extraordinarily volatile in value. Earlier this week, reports that Goldman Sachs had decided to back away from opening a cryptocurrency trading desk because of uncertainty about regulatory requirements quickly prompted what Fortune described as a “Bitcoin bloodbath”, with sharp price drops for better-known cryptocurrencies such as Bitcoin (more than 12 percent), Bitcoin Cash and EOS (both more than 20 percent), Ethereum (nearly 19 percent), and Ripple (more than 12 percent).
That overall volatility is unlikely to subside soon. Authorities in the United States and other countries continue to move with extreme caution in expanding the market for cryptocurrency or cryptocurrency-based products without close regulatory control and oversight. In addition, on September 5 Reuters reported that “[t]he market capitalization of crypto assets, such as cryptocurrencies and crypto tokens issued for an ICO, has fallen to around $200 billion in August from a peak of more than $800 billion in January,” with Bitcoin decreasing by approximately 60 percent against the dollar in 2018. When Warren Buffett says, “I can say with almost certainty that [cryptocurrencies] will come to a bad ending,” only speculators (or extraordinarily patient investors) with nerves of steel and painstaking business intelligence-gathering can afford to deal in cryptocurrencies in the immediate future.
Attractiveness to speculators, however, is the last thing that a true national currency needs. If, as The Economist correctly observed, a currency must be a medium of exchange, a store of value, and a unit of account, cryptocurrencies fall short in all three respects. Admittedly, even official national currencies can experience catastrophic volatility, as Iran, Venezuela , and Zimbabwe have lately been experiencing. But to tie a drastic currency reconversion to a widely discredited so-called “cryptocurrency” (as Venezuela has done) or to propose a national cryptocurrency as a means of evading economic sanctions (as Iran has proposed)), is likely not only to enhance that volatility but to cast further doubt on the reliability of cryptocurrencies for any of those purposes.
One issue that has received little if any attention in the debate over cryptocurrencies is whether the term “cryptocurrency” has outlived its usefulness. Bitcoin, as The Economist stated, “began life as a techno-anarchist project to create an online version of cash, a way for people to transact without the possibility of interference from malicious governments or banks.” So long as cryptocurrency advocates cling to the dream of a medium of exchange that can function consistently and reliably for legitimate transactions and that governments cannot track or regulate, the very term “cryptocurrency” will continue to arouse suspicion and deter widespread adoption. On the other hand, innovation in payment mechanisms and systems whose functions and technology are transparent, and that are operationalized to comply efficiently with diverse regulatory obligations throughout the world, should always be welcome in economic affairs. The sooner that cryptocurrencies accept those realities, the greater the odds that Warren Buffett – unlikely as it seems – might eventually be proved wrong.