Crypto as money.
This has basically become a vision that is only a dream. We have more than 15 years of evidence to back it up. What is interesting is there are more articles coming out stating this exact thing.
Even the uber-Bitcoin maximalist, Michael Saylor, has changed his tune. No longer is be promoting Bitcoin as the financial cure for everything. Instead, he hopped on the "store of value" bandwagon. Of course, there is an issue with this as we will discuss in a moment.
Before going any further, this is not to say that crypto is dead. Far from it. Anyone who regularly reads my articles knows I am extremely optimistic. Crypto and AI are going to be one. My future prediction, as real world assets get tokenized, is that we will see the total market capitalization of crypto topping $1 quadrillion.
So why does crypto fail as money?
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The View That Crypto Fails As Money Is Picking Up
I long discussed the idea of crypto as a medium of exchange. The failure to attain price stability makes is enormous. One of the biggest mistakes is to call crypto "currency". The proper framing is "crypto-assets".
The fact that people speculate upon this shows exaclty what it is. There is a market for crypto against the largest currencies. Here we have something different than FOREX.
So how is most crypto traded?
Bitcoin and other cryptocurrencies have become popular as investments, similar to stocks or as some experts call it—Bitcoin is the ‘digital gold.
With Gary Genlser out of the way, we can finally talk about this. Most crypto is similar to a stock. My view is we are not dealing with a security since there are not the same rights inhernet with stock ownership. However, when we look at most crypto-assets, they capture the value of a network, application, or meme.
Naturally, market activity determines price, which can be misaligned from the underlying value. The same is true for stocks. It is what makes markets, well, markets.
Wherever there is volatility, we are dealing with something that is counter to being a currency. It is, nevertheless, the great asset to trade and, potentially, reap large rewards.
Technical Issues
There is a growing faction of people who view crypto as a money failiure pointing to the technical aspects.
Bitcoin’s block creation process, which happens every 10 minutes, limits how many transactions it can handle. During busy times, fees go up, and transactions take longer to confirm. This makes using Bitcoin for small, everyday payments inconvenient and expensive.
L2 solutions like the Lightning Network try to make Bitcoin faster and cheaper, but such solutions still depend on the same slow base layer. This means the core problem remains unsolved. As a result, Bitcoin is mostly used as a store of value or an investment rather than as a way to pay for everyday commodities. For crypto to be widely adopted, it needs to move beyond this basic limitation.
While this is accurate, there is a problem with the viewpoint.
The presumption here is that if these problems are fixed, all is well. To me, this is simply not the case. Most crypto will always fail as a medium of exchange. Ironically, if it didn't, few would pay attention.
Do most follow crypto because of the development as a new payment system? I would say the majority do not care. What is it that captures so much attention?
I think memecoins answers that question. People want the quick money. That is what 95% of the people involved in crypto focus upon. They are not building payment rails, looking to develop applications or businesses that are crypto based.
As always, it is only about green candles.
For this reason, if the technical aspects were solved, crypto-assets would still fall short.
Store of Value
The view of money is that it has 3 major characteristics:
- store of value
- unit of account
- medium of exchange
My problem with this is we are dealing with an economist view of things. The store of value, when you think about it, doesn't hold. If it did, things would not go up or down.
Bitcoin is a lousy store of value. Certainly, over a long period of time, it went up. However, there are many instances when the price dropped 50% or more. Is that considered a store of value?
Having something that requires the proper timing is not a store of value. Again, Bitcoin has a record of being a tremendous long term asset to hold. The same is true for Apple stock. Few are considering Apple to be money.
The sad reality is the business cycle is undefeated. Bitcoin, along with other crypto-assets, tend to go up and down with this. During a downturn, all asset prices tend to collapse. Slowing economic conditions means we have defaltionary (in the contemporary terms of pricies) pressure.
When this happen, crypto investors lose their cookies. They are not calm and serene people.
Crpyto-assets are risk on/risk off. This means that when investors are taking on more risk, i.e. moving further out the spectrum, Bitcoin and others can run. It is no different then high P/E stocks.
Risk on usually occurs when there is optimism that the business cycle will enter expansion. Keep in mind that markets move faster than economies, so they precede moves by 12-18 months.
The opposite is also true. When investors turn pessimistic about the future, they tend to move towards safer assets. Contrary to many views, this is not Bitcoin as evidenced by the many crashes over the last decade.
The Crypto Market
Why do people get killed in the the crypto market?
Simply put, they are playing penny stocks. Outside of of Bitcoin, Ethereum, and maybe a few more, we are dealing limited "blue chip" assets. The problem is people do not think against a backdrop like they would a stock.
What is behind the asset? Is there development on the network? What type of growth are we seeing? How much activity is there?
These are some basic questions that people do not ask. Obviously, some are difficult to ansewr which makes the crypto market difficult.
In addition, what are the future prospects? Where kind of building is taking place? What are the plans for the team behind the network or application?
Of course, there is a market for people simply gambling. The penny stock world is large. Some make a fortune while most lost all they put in. It is treacherous waters but one that can be profitable.
That said, it is not for most. If we look at the majority of the volume on exchanges, it goes to the top 2,000 companies (with a few blue chips totally dominating).
Sadly for many, this mindset doesn't exist with crypto. If people look at these as crypto-assets instead of trying to shoehorn it in as a currency, they might be better off.
As time passes, we are seeing more people waking up to this fact.
My guess is the future of crypto adoption will be the development of better payment rails and scaling of stablecoins. That is where the "currency" aspect will come from.
As for the rest, they are really crypto-assets that capture the value of whatever it is associated with. Markets determine price which sends things soaring, or crashing, depending upon the sentiment.