NEW YORK CITY: Scepticism over the viability of cryptocurrencies has its roots in the framework of money as a medium of exchange, unit of account and store of value.
Critics of bitcoin point to its instability and lack of nimbleness in transactions, but there are very good reasons for business leaders to invest in it.
In terms of exchange, cryptocurrencies are cumbersome and transactions are slow to execute compared with incumbent platforms, like credit cards and conventional currencies.
Whereas Visa and PayPal can execute 24,000 and 193 transactions in a second respectively, bitcoin can only complete seven transactions per second.
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Moreover, in order to achieve status as a medium of exchange, money has to be both widely trusted and have a critical mass of users.
Today, bitcoin fails on both counts.
As a unit of account, critics say cryptocurrencies’ value is too unstable, hindering corporate leaders’ ability to plan and operate their businesses effectively.
According to a report by JPMorgan, “Bitcoin’s three-month realised volatility, or actual price moves, is 87 per cent versus 16 per cent for gold.”
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BITCOIN USEFUL IN EMERGING ECONOMIES
However, such currencies can be a reliable store of value, and offer a solution to a number of problems – particularly in emerging economies.
They provide an alternative way to park savings. Unlike conventional currencies, they do not contain the risk of inflation so can maintain purchasing power in real terms.
In this sense, they can avoid the risks of devaluation brought about by profligate governments. They can also provide stability and transparency in politically volatile environments.
Finally, many emerging markets rely on remittances. Remittance flows to low and middle-income countries touched a record high of US$548 billion in 2019, larger than foreign direct investment flows (US$534 billion) and overseas development assistance (about US$166 billion).
Cryptocurrencies allow people to send money at a significantly lower cost than other currencies – transaction costs can be 50 per cent to 90 per cent lower than those of traditional methods.
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CRYPTOCURRENCY AS DIGITAL GOLD
Clearly, there is a compelling case to be made for cryptocurrencies as a…