What bitcoin will never be
Everyone seems to be asking: “should I invest in bitcoin?”
Given its phenomenal growth, it’s not surprising. In March, one bitcoin traded at under $950. On September 1 it reached just a fraction under $5 000.
However, when asked this question, UBS Wealth Management global chief economist Paul Donovan questioned its premise: “Going to Monte Carlo would be a better option. It would be more fun.”
His point was that there’s really no such thing as “investing” in bitcoin. If you’re buying bitcoin, you’re speculating. This is true for all cryptocurrencies, he argued, because they aren’t and will never be actual currencies.
All currencies must have two characteristics. First, it must be accepted as a medium of exchange. “No currency has intrinsic value. Currencies are only worth something because you can get something useful in exchange for them. Someone else must be willing to accept them in return for goods and services.”
While bitcoin and a number of other cryptocurrencies are accepted by some businesses, he argued there’s good reason why they would never gain universal acceptance.
“The largest transaction in almost any economy is paying taxes. But governments don’t accept bitcoin and never will, because they know that being the monopoly provider of money is a huge economic advantage. They will never throw that away. As a result you will never have these cryptocurrencies accepted as a medium of exchange for the single biggest transaction in any economy.”
Second, a currency must serve as a store of value. “If you are going to use something as a medium of exchange, you want to have a reasonable expectation that what you can buy with it today, you will still be able to buy with it tomorrow.”
Hence when an economy experiences hyper inflation, the currency essentially loses its status, like the Zimbabwe dollar. But that’s the extreme, because in a normal, high-inflation environment there’s still an expectation of ways to invest your currency for it to retain its purchasing power. It therefore still serves as a store of value.
With bitcoin, however, its value as measured by its price against the US dollar is extremely volatile. “For example, in 48 hours this week, bitcoin fell 20% against the dollar,” Donavan said.
“The blockchain is essentially an efficient transmission mechanism. UBS and other banks have adopted blockchain technology that speeds up transactions between major banks of the world. But you need to separate the underlying technology from bitcoin itself, which is not an actual currency.”