Do you think that cryptocurrencies will replace traditional currencies in everyday life?
Sorry, but your belief is rubbish.
That’s the succinct opinion of Vicky Redwood and Kerrie Walsh, economists at Capital Economics, who think that rather being the future of money, cryptos such as bitcoin are just a bubble waiting to implode.
“Our view is that Bitcoin is a bubble,” say Redwood and Walsh.
“Indeed, the latest price falls suggest that the bubble is bursting — although with prices still 10 times higher than a year ago, they have a lot further to fall yet.”
Redwood and Walsh say there are several reasons why bitcoin won’t succeed in becoming a mainstream form of payment.
“Bitcoin bulls point to its long-run potential to replace national currencies, but there are various reasons to doubt this,” they say.
“Admittedly, some of these are just technical ––such as Bitcoin’s slow processing power — that might be solved over time.
“But even if this is the case, Bitcoin is clearly at risk of being usurped by a ‘better’ cryptocurrency.”
And even if there is a ‘better’ cryptocurrency out there, Redwood and Walsh suggest that one of the key features of cryptos — a finite supply — could lead to adverse economic outcomes such as deflation.
“A key feature of most cryptocurrencies is that they have an exogenously determined supply, meaning that governments or central banks cannot inflate away their value,” they say.
“But this means that swings in money demand therefore lead to big changes in prices or activity. A widespread adoption of Bitcoin could prompt a rerun of the problems seen under the Gold Standard.”
And Redwood and Walsh think that bitcoin will be a lousy store of value, eliminating another key reason why people are buying it at present.
“Most people are buying Bitcoin, not because of a belief in its future as a global currency, but because they expect it to rise in value,” they say.
“Accordingly, it has all the hallmarks of a classic speculative bubble, which we expect to burst.”
Redwood and Walsh say the potential triggers for the bubble to burst are likely to come from a further crackdown by regulators or a major hacking attempt.