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For many enthusiasts, technologists and libertarians, Bitcoin and other cryptocurrencies are the future of a world with a free market without government restrictions or central banks. It’s a more democratic, secure and anonymous currency. Few people use online sites like Bitcoin Pro to invest in Bitcoin market with automatic bots. For others a bubble that will never be a currency and it better not be. Why?

Key

The Bitcoin bubble shows that this is not the currency of the future but of the past: the future already exists with the electronic currency.

Bitcoin has two other big problems: it is deflationary and not very flexible for the real world.

Bitcoin and cryptocurrencies are still in the innovation phase but three problems need to be solved: deciding if they are investments or tools; separate from the notion that they are coins; and solve storage and sales problems.

Bitcoin is not the future, it is the past

From the point of view of economic theory, Professor Paul De Grauwe analyzes the rise of Bitcoin and how it seems that there is no limit to its bubble, at the level of the great bubbles in history.

When the bubble bursts, the price collapses.

What is the expectation based on Bitcoin and the like? The idea is that they are the currency of the future but nothing is further from the truth. In fact, says De Grauwe, Bitcoin is an archaic currency that uses, like gold, scarce resources.

Therefore, more than a cryptocurrency of the future, bitcoin is a currency of the past: instead, the electronic currency, increasingly cheaper in terms of production, is the currency of the future. And although Bitcoins can reduce their production costs, they compare very poorly with existing technology.

Why can’t it be a currency?

There are also other relevant reasons why cryptocurrencies have no future as means of payment and units of account, that is, the main functions of money. First, Bitcoins’ supply is set asymptotically, not responding to the growing demand and supply need of this currency. The Bitcoin-based economy, then, would face permanent deflation with profound economic consequences for investors, entrepreneurs and future growth.

Along these lines, Matt O’Brien in The Washington Post also denies the role of Bitcoin as a currency and highlights this same aspect: the mysterious creator of the coin decided that there would only be 21 million Bitcoins. That explains why when demand increases the price also increases. But, he wonders, what does it mean for a currency to increase its value, as Bitcoin has done, from $ 775 last year to more than $ 17,000 today? Well, with the same currency, you can buy 22 times more things than before. This means that “the prices of everything have plummeted in terms of Bitcoin. That is, again, deflation: 95.4 percent, to be exact.

And this is neither more nor less, the death of a currency. So, are we really facing the cryptocurrency of the future? Would you hire a mortgage in Bitcoin that was originally $ 200,000 but that can become $ 3.4 million a year later?

De Grauwe also points out a second aspect, even more relevant even with regard to the future of Bitcoin, which makes Bitcoin a dangerous currency since it faces an alleged idealized world – where Bitcoin would be central – with the real world. Bitcoin would not be backed by a lender of last resort, central banks, and when the crises came, and they always arrive, everyone would go to liquidity but this would be nonexistent. If there are no central banks that provide liquidity, it goes towards deflation and insolvency. A Bitcoin economy is not flexible enough.

But this absence of central banks is for the market fundamentalists the most remarkable. For some, Bitcoin has become the symbol of a free market world where, freed from government controls, wealth will be created for many, with self-regulated markets that will prevent crises. There, Bitcoin will play a central role there. But not in the real world, concludes De Grauwe.

But then, if it is not a currency, what is it? O’Brien is equally critical: it is not only a failed currency, it is also a failed payment system due to its slowness and costs (such as the bandwidth needed to make the transactions), which make it a new and not improved PayPal.


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