The Crypto Conundrum

Context: Current rally in bitcoins has witnessed the increasing participation of retail investors in India, after Supreme Court overturned an order by the Reserve Bank of India restricting the use of crypto currencies.

Benefits of crypto currencies

• Limited supply helps investors to protect their wealth, to seek abode in alternative assets whose supply cannot be cranked up as easily.
• Delinked from any other economic activity: Creation of lot of money by central bank, leads to an increase in prices of not just goods such as food and cars but also alternative forms of money such as gold and silver.
• May act as future value as a currency that’s why investors are bidding up price of bitcoin because they foresee a future in which private currency is widely accepted as money.
• Offer people greater choices in what currencies they choose to use as a medium of exchange as private alternatives to fiat currencies.
• Furthering free-market competition in money: Through denationalization of money.

Issues associated with crypto currencies

• Crypto currencies possess no significant fundamental value to sustain their current high prices: Adoption of crypto currencies as money based solely on scarcity without any fundamental value (use-value or exchange-value).
  • Eg: Stocks and bonds, possess exchange value that is based on the expected future cash flow from these assets.
  • Eg: Commodities such as oil and steel possess use value because these assets are used to run vehicles and build real estate.
  • Eg: Gold and silver traditionally served as hedges against inflation because they possess fundamental value derived from their use as jewellery and money.
  • Bitcoin and other crypto currencies neither offer direct use value nor possess significant exchange value to buy real goods and services.
• Extreme volatility in prices of crypto currencies: Due to nascent, illiquid nature of crypto currency market.
• Risks of government crackdown: As government fears the outcome that competition between currencies would ensure that fiat currencies that are printed indiscriminately simply go out of use.
• Assault on monopoly of state over issuance of money: Monopoly control over money allows governments to indirectly tax citizens by increasing the supply of currencies, thus devaluing them.
  • Government will allow crypto currencies to exist only as long as these currencies remain a speculative asset and not a medium of exchange.
  • Eg: Complete ban on all crypto currencies by China.
• During crisis time such as current pandemic, crypto currencies may not be of much use: As monopoly of the governments over the issuance of money allows it to fund its budget deficits, particularly during times of crisis when tax revenues took an unprecedented hit.

Conclusion: Cryptocurrencies possess no significant use value or exchange value and the underlying risks deflates their wider acceptability in near future.