Jeffrey Dorfman, an economics professor at the University of Georgia, sees bitcoin as an asset rather than a currency. Writing in Forbes that value of the cryptocurrency increased 140% in 2016 and 49% in the past month, Dorfman maintains the swings in either an upward or downward direction do not make bitcoin a plausible currency as much as a speculative asset.
Bitcoin does not make a good currency for two key reasons: its unstable value and its slow transaction time.
Dorfman claims the most important feature a currency has is being a stable store of value. This factor is important to a developing economy trying to attract investment. It is also important for developed countries to allow investors to earn the returns they expect on investments. An unstable currency makes it difficult for investors to predict the value of future earnings.
Because uncertainty makes investments less valuable, less investment occurs.
Bitcoin Price Swings
The value of bitcoin changed an average 2% over the last month, Dorfman noted. The exchange rate between the U.S. dollar and the euro, by contrast, was under 1% and only changed 3% for the full month. There were seven days when the value of the cryptocurrency changed more than 3%, which is more than the dollar’s value changed for the full month.
People do not want debts or investments denominated in a currency with value changing by nearly 50% monthly, Dorfman observed.
As for transactions, bitcoin is slow due to the process of protecting the security of its blockchain.
There are restrictions on how many bitcoin transactions can be completed in a day. Changing the rules for processing BTC transactions has met resistance in the bitcoin community from those who wish to preserve its traceability and anonymity.
Dorfman claims bitcoin’s security negates its value for everyday use.
He said the cryptocurrency’s main value is for speculation and for shielding transactions. It is a commodity asset that people trade.
Speculation has value, Dorfman noted. It adds to market liquidity and determines assets’ market value. Where bitcoin differs from other assets is that it does not have an underlying use. One can invest in jewelry or gold, for instance. Bitcoin, by contrast, is used to hide wealth, conceal illegal transactions and to trade in order to gain or lose value.
Bitcoin’s popularity, Dorfman noted, confirms the value many people see in the cryptocurrency. He said he has no problem with people using bitcoin for these reasons, but people should stop expecting it to be a currency for everyday transactions. It is destined to remain in its niche to speculate and to conceal.
Featured image from Shutterstock.