We have been tracking cryptocurrencies for a long time, and even written about it long ago, but have intentionally refrained from writing about it on our site. Despite it being a potent example of what happens when frontier markets become mainstream, the whole crypto-currency story has been well covered elsewhere. Officially, we have oscillated between bullish and bearish over the years and not really taken a stance. (Disclaimer: We bought a single BitCoin back in early 2014 as a way of researching the market, and have held it through the euphoria of last year).
But there is a major difference between how frontier equity or bond markets would benefit from mainstream adoption of investors, and how Bitcoin or other altcoins would benefit from mainstream adoption of it as a currency. While frontier equity/bond markets would certainly stand to benefit, we think that if Bitcoin actually matured into a viable currency, it would be disastrous for most current Bitcoin (BTC) bulls.
Why Do Bitcoin Bulls Want To Pay For Everything In Bitcoin?
It seems odd to us that BTC Bulls would even want it to become a widely accepted currency. Sure, we get the main argument, that if BTC is used in more transactions and adopted by the mainstream, then since the amount of BTC in the world is fixed/scarce, prices will eventually skyrocket. But tell that to anyone who has ever bought anything denominated in BTC before 2017.
A necessary requirement to BTC being adopted as a form of payment and mainstream currency is stability. High volatility is a main reason this chart of Top 500 e-commerce merchants BTC acceptance from Morgan Stanley has been called “the saddest bitcoin chart ever”:
That is because “volatility is a feature of Bitcoin, not a bug”. The fact that you can become a BTC millionaire is a valid reason to be bullish on BTC, because while your downside is capped, your upside is theoretically infinite. High volatility also means your brain gets more hits of dopamine every time your portfolio gyrates higher, fueling a crypto buying craze.
But in order to become a real currency, volatility would have to go down. And low-volatility for Bitcoin would be a death-knell; given how speculative a lot of the “investments” into it are and its previous high-flying nature, I would suspect a lot of people would move on to the next hot thing rather than tracking 50 basis point moves in the spot rate.
See how gold, the original non-fiat currency, traded during and after the gold standard. For speculators, gold being dropped as a currency and becoming a “scarce” collectible was the best thing that ever happened for gold bugs.
Or take the almighty USD. It’s the world’s reserve currency, and backed by the strongest and most innovative economy in the world (U-S-A! U-S-A!). Are people hoarding US dollars? No, and it would not have been particularly profitable anyway. Instead, US equity markets are at all time highs, because if you want a piece of that US innovation, you should be buying the companies that fuel it, rather than the currency.
This line of thinking leads to a second major point:
A Bitcoin ETF Goes Against Bitcoin Becoming A Currency
If BTC becoming a mainstream currency is cited as bullish case #1 for BTC bulls, then a BTC ETF driving investment into crypto as an asset class would usually be cited as bullish case #1A. They seem to go hand-in-hand – mainstream adoption will lead to the promised land for BTC bulls!
We’ve already established that high volatility is bad for BTC’s viability as a currency. But so does speculative hoarding, as described very well in this post by Elaine Ou. A lot of people buy BTC because they want a stake in the blockchain as a disruptive technology. But to go back to our US currency vs equity example, is investing in BTC an investment in the currency or the technology? As her blog post lays out, it can’t really be both.
Bitcoin As A Mainstream Currency Is Unattractive
High transaction fees and low transaction bandwidth are already commonly cited problems with BTC becoming a currency. But let’s say technological breakthroughs enable BTC to become a mainstream currency in terms of utility, how does it compare to other currencies?
Pretty poorly. While officially there is no interest rate on BTC (although you could argue forks like Bitcoin Cash are akin to dividend payments), there is a real cost to maintaining the blockchain and in storing Bitcoins in cold storage. That means it is a currency with negative yield. Given the importance of carry to how well a currency performs versus its peers and how much attention it gets from speculators (hint: carry trades work most of the time), that does not bode well for BTC.
Not to mention that there is no “real” demand for BTC. Normal currencies do not “go to zero” like equities do because there are companies in those countries producing goods and services that drive an economy denominated in that currency. As currencies weaken, that country’s exports look more attractive, which eventually creates a current account surplus, which means that there is money to repatriate back home that leads to demand for their local currency. This is real demand for a currency created from the economy.
BTC does not have that, since all crypto companies eventually deal and keep financial records in fiat currencies. Demand for BTC and cryptocurrencies themselves currently comes exclusively from outside investors, which also means that if demand from them stops, there is nothing propping it up.
So we don’t think BTC will ever (or should) become a currency. But how does it look if you approach it as “Millenial gold”, as a collectible/scarce asset class worthy of the attention from investors/speculators it currently receives? That is a post we will look at for the future.