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With the crypto market’s rally, Bitcoin (BTC) and other cryptocurrencies have become popular once more. While their adoption as a means of exchange has also risen during the coronavirus pandemic, an economist from UBS warns that that cryptos can’t be really considered as currencies due to their volatility.
“If we look objectively at the issue, I think an important question is whether bitcoin and other crypto could be currencies,” UBS Global Wealth Management chief economist Paul Donovan said, according to Bitcoin.com. “And, I don’t think that they can.”
Donovan believes that people are still reluctant to use cryptos as currency because they lack price stability. “One of the key reasons for that is that a currency has to be a stable store of value,” the UBS chief economist added. “With a proper currency, you got a genuine certainty that the basket of goods you can buy today is going to be the same as the basket of goods that you can buy tomorrow.”
The UBS economist said that the flaw in cryptocurrency’s system is the lack of a mechanism to balance supply with demand. “It’s all down to a rather fundamental flaw with crypto,” Donovan added. “In order to achieve stable spending power, a store of value, the balance of supply and demand needs to be maintained.”
This regulating mechanism is present in all fiat currencies issued by governments. “So, if demand for proper currency goes down, the central bank can reduce supply, maintaining the balance and therefore maintaining spending power,” the UBS chief economist said.
Donovan explained that the lack of this mechanism is what makes crypto prices so volatile. “But if demand for crypto goes down, and self-evidently it does, the supply cannot go down to maintain balance,” he added. “So, the value, and the spending power, immediately collapses.”
This lack of price stability makes crypto unappealing as a means of payment, according to Donovan. “But people are unlikely to want to use something as a currency if they got absolutely no certainty about what they can buy with that tomorrow,” he concluded.
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