The term cryptocurrency suggests that the digital placeholders on a blockchain have the same purpose as euros or US dollars, for example. However, this is not the case, since 90 percent and more of all cryptocurrencies have an application that is above their function as a universal payment and value storage medium. There is no logical reason why you should pay for your rolls at the bakery with Cardano, Solana or Polkadot. After all, you don’t pay for your coffee with a tokenized Tesla share.
If cryptocurrencies are to pose a threat to fiat currencies, then one would have to focus on those that are designed as payment tokens, such as Bitcoin, Monero or Dash. But here, too, you have to ask critically why you should pay for purchases with Bitcoin instead of euros. Unless it is a hyperinflationary country without a functioning currency, there are practically no rational reasons other than idealism to pay for your purchase with a currency other than the respective fiat currency.
Value storage yes, currency no
In terms of a currency, Bitcoin should not pose a threat to any currency area that does not have massive economic problems. The situation is different with the value storage function, which has represented the actual primary function of Bitcoin over the past few years. In the spirit of digital gold, the narrative that Bitcoin benefits from the loss of confidence in fiat currencies and their inflation is caught. In principle, this thesis cannot be contradicted.
However, the motivation can be compared more with an investment in gold than with a flight into another currency. In principle, gold is also not used for payment. After all, it makes a difference whether you invest in a precious metal in order to own a limited material asset or another currency such as the Swiss franc. A risk that Bitcoin could now replace another fiat currency cannot yet be justified.
Better central bank policy through Bitcoin?
What is not, can still be. Careful attempts at using Bitcoin as a payment currency, as in El Salvador, nonetheless give rise to hope that Bitcoin, with decreasing volatility over the next few years, could increasingly become a fiat currency alternative. On the basis of this, the theoretical conclusion can be drawn that cryptocurrencies can play an important educational function in monetary policy.
Unless digital currencies are banned, they can theoretically compete with the respective fiat currency. As a result, this increases the motivation for the central bank to pay more attention to monetary stability. However, the competition has a catch here too: It only works as long as the fiat currency dominates. If things turn out differently and people switch to private crypto currencies to pay, then a ban, as already in place in some countries, would quickly take hold.
When inflation began to escalate in Turkey a few months ago, one of Erdogan’s first reactions was to ban payments with cryptocurrencies. There can therefore never be any talk of free competition between fiat currencies and crypto currencies, not even in the euro zone or in the US dollar area.
This is how much the US dollar benefits from cryptocurrencies
How much Bitcoin and Altcoins can even contribute to the strengthening of a fiat currency can be seen with a look at the US dollar. While the state US dollar “only” too around 60 percent the world reserve currency, this share is over 90 percent for tokenized fiat currencies, more precisely for stablecoins. Of the 20 largest stablecoins, 18 are based on the US dollar. Also in terms of trading volume, the largest USD derivatives make Tether (USDT), USD Coin (USDC) and Binance USD (BUSD) accounts for well over 90 percent of total stablecoin sales.
This additional demand for US dollars – due to the stablecoin cover – in turn strengthens American monetary policy. The more US dollars are in demand through foreign demand, the more the American state can go into debt. In other words, the more USD stablecoins there are in circulation, the easier it is for the Fed to print money without this having negative consequences. The mechanism of action is comparable to that of crude oil, which is normally billed in US dollars.
Key crypto currency: Tether instead of Bitcoin
Anyone who is active in the crypto sector themselves can tell a song about it. Hardly anyone should have a foreign currency account in US dollars at their house bank. Most of the people who are active in the crypto market have certainly already held USDT or USDC.
To put it a bit exaggeratedly, Bitcoin is not the crypto key currency, but Tether USDT. After all, its daily trading volume is the highest of any cryptocurrency. On a few days, its daily volume makes up more than 50 percent of total sales in the crypto market.
The more the crypto sector grows, the greater the demand for stable, tokenized fiat currencies in the crypto market. The escape from the volatility of cryptocurrencies is therefore also an opportunity for fiat currencies.
Do not disregard interdependence
If you break away from the idea of competition between crypto currencies and fiat currencies, then a stronger bitcoin while fiat currencies remain stable at the same time is not mutually exclusive. There is much more to crypto adoption than just distrust of fiat currencies.
Stable fiat currencies are the basic requirement for investment and growth. The capital that flows into the cryptocurrencies must be generated within an economy, unless it is withdrawn from other assets – as can be observed with gold.
If we want to see the market capitalization of the numerous digital currencies increasing, then we also need a stable US dollar, euro, etc. Without stable currencies, there will be no strong economies, and without strong economies, there will be no strong crypto-economy either.
More opinion than science
It is difficult to deny that Bitcoin competes with fiat currencies in parts. Still, it would be too easy to base the Bitcoin value proposition solely on the fiat currencies. Especially since the majority of crypto currencies of their kind are more like decentralized tech companies, ergo stocks, than currencies.
Due to the short history of cryptocurrencies, many of these assumptions are based only on guesswork or only for short periods of observation. How Bitcoin will react to the planned interest rate hikes of the US dollar, for example, can only be guessed based on our assumptions, but not scientifically proven. Finally, there is a lack of comparable precedents from the past, in which Bitcoin already existed and possessed comparable macroeconomic relevance.
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