Why Cryptocurrencies Are Not Currencies
Sitting in a South Delhi restaurant, my ravenous eyes scoured the menu. They caught on to the Bombay Duck and promptly placed the order. As I sat there salivating to the savors of exotic poultry, the waiter plopped down a pile of putrescent fish on the table. Instantly, my appetite vanished and I locked a disgruntled gaze with my food-to-be. To make matters worse, the hefty bill soured the little pleasure I was trying to suck in from the ambiance. Feeling utterly powerless, I quietly puppied out of the room. Though denied food, I had been served with a meaty lesson: Misnomers are dangerous. They can dupe us into dishing out exorbitant money for misconstrued fantasies — bubbles that burst when we are least expecting. And that is exactly what will happen to you if you misrecognize cryptocurrencies as actual currencies.
Wherever cryptocurrencies are legalized they are traded as assets. This means that they do not have an inherent face value as government-issued currencies do. Investors come under the purview of hefty capital gains tax on the income earned from the digital coins. To illustrate how cryptocurrencies are not currencies, we need to reexamine what money is. According to the prolific economist, Connel Fullenkamp, currencies are defined by their functionality. He boils down the definition to three chief functions — medium of exchange, unit of store value and unit of account.
Governments all over the world place stringent regulations on the mining and sale of cryptocurrencies. For Bitcoin, these regulations translate into delayed transaction times. On average it takes about 3 hours to receive transaction confirmation with the duration rising by the amount transferred. Even though the durations may dwindle in the future, currently they are too high for assets like Bitcoin to be efficient mediums of exchange. Additionally, the cryptocurrencies face inherent price volatility which greatly bites into their store value. For instance, they are periods where Bitcoin fluctuates over 15% in a single day rendering it a rather shoddy place to store value. Finally, these token suffer from a huge possibility of counterfeit because of their open-ended operations. With the possibility of a rapid surge and flow, it is unlikely that cryptocurrencies become units of account anytime soon. Because cryptocurrencies defy the very functionality of a currency, it is border-line ridiculous to argue that cryptocurrencies are currencies in their present form.
All this is not to say that cryptocurrencies are just a ploy to rob money. Nothing could have been farther from the truth. They are an intriguing idea that would offset governmental control over monetary policy in the long run. An inclusion that would revolutionize digital payments in the years to come. However, at the same time, they are also an idea that needs to be fleshed out further before it can occupy mainstream discourse like government-issued currencies or be traded at foreign exchanges.
Unfortunately, widescale misconceptions prevail in the market about the nature of the enterprise in its present form. An ING recent survey of more than 13000 people presents dismal statistics. Over 31% of the responders think that Bitcoin and Ethereum have constant values while another 27% believe that a Central Body regulates them. Surprisingly, around 21% of people assumed that Bitcoin and Ethereum had an existence beyond the digital domain. Such misconceptions often mislead underinformed households into shaving their savings only to open doors to back-breaking losses in the volatile crypto trade. Over the years, Crypto scams are scaling new heights with over 24 million dollars of fraud in 2020 alone. Therefore, dispelling the clouds of uncertainty around cryptocurrencies has become even more pertinent.
In conclusion, you should exercise both free will and caution when it comes to buying cryptocurrency. Investors should be cognizant that they are purchasing an asset and not a currency and therefore must factor in the risks associated with the investment. No one can deny the chances of astronomical returns that surround the enterprise and there are authentic stories of people who netted millions in a couple of touch strokes. But make no mistake, when the crash descends, many will be left reeling the horrors of the Dotcom burst or even the Housing Market Crash. And this time we won’t even have the Fed or the government to bring in the bailouts. So, if you are as naïve an investor as I am, the Bombay Duck of Untruth is out there to get you. Double-check the landing ground before you take the plunge.