Cryptocurrencies hit the big time in January, but doesn’t mean they are money.
Not yet anyway.
In January the cryptocurrency market hit a major milestone. The market value exceeded $1 trillion in value, with Bitcoin accounting for more than two-thirds of that value.
That market size makes crypto a major asset class along with stocks, bonds and precious metals.
But it still doesn’t make cryptocurrency money.
That may come as a surprise to some people who keep saying that Bitcoin and other cryptos are the future of money. The problem is that none of these upstart cryptos have all three of the necessary attributes of money.
Yes, money can be anything we choose but whatever you choose, be it shells or paper or anything else, it must have all of the following three properties.
Store of Value
Money must be a store of value. That means it will buy pretty much the same value of goods and services tomorrow as it will today. If that isn’t true, then its not money.
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We can safely say that Bitcoin doesn’t meet this key criteria. In mid-March one Bitcoin would fetch nearly $61,700, compared to a recent price of around $57,350. That’s a plunge of around 7% in a matter of days. Imagine if the spending power of your savings shrank that amount in a matter of days? You’d probably want to hold your savings in something more stable.
Medium of Exchange
Money must be a medium of exchange. Or put simply, it must be the stuff you use to buy goods and services. In the U.S. people and businesses use U.S. dollars, in the UK they use pounds Sterling, and in the eurozone they spend euros. So far, at least, Bitcoin and the other cryptos don’t reach this hurdle because for the vast majority fo the world, cryptocurrency is not how people buy anything.
Yes, Elon Musk did announce that it will take Bitcoin to pay for electric vehicles manufactured by his company Tesla TSLA . Yet the price of a Tesla vehicle is still noted in dollars, not Bitcoins, which brings us to the third hurdle.
Unit of Account
The final attribute that money must have is it must be the unit of account. It is how we measure wealth, value, and debts. As far as I can see, no one is preparing their business or personal accounts using cryptocurrency as the units.
Instead, people still use U.S. dollars and other major currencies. Indeed, the unit of account at Tesla is dollars. If you doubt me try looking at the official company accounts here.
If money loses anyone of these three attributes then the other two will likely disappear as well. That likely would have happened in the 1983 Hong Kong currency crisis without the swift introduction of a peg to the U.S. dollar and the help of the U.S. Federal Reserve.
Currently, Bitcoin and cryptos have none of the three necessary money attributes. They need all three, and it will likely be a while before that happens.