At the end of last year, the Big Seven (G7) published a report stating that bitcoin and others cryptocurrencies still do not constitute a “reliable and attractive” means of payment.
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In particular, the G7 researchers are sure that cryptocurrencies are extremely volatile, difficult to use, they have scalability problems and regulatory risks.
A similar opinion was recently expressed by the American billionaire Ray Dalio - he believes that the first cryptocurrency refers to speculative assets and is ineffective as a means of exchanging or maintaining value.
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Forklog log tried to find out ifThe “slow, volatile and poorly scalable” bitcoin functions of money, and also what it is more - an intermediary in the exchange, a means of preserving value or a speculative asset.
Bitcoin and money theory
So far, the regulators of various countries have not come toa common denominator in matters of cryptocurrencies and therefore interpret their essence in their own way. Some equate bitcoin to assets, others to means of payment, still others to goods, and still others completely prohibit the circulation of digital currencies, calling them extremely speculative tools and a tool in the hands of criminals.
Before answering the question of what cryptocurrency is, let's turn to the basics of monetary theory.
Money manifests itself through their features:
- The measure of value, which helps to exchange various goods among themselves on the basis of price.
- Medium of circulation - the role of the intermediary in the exchange. In this context, a liquidity indicator is extremely important, characterizing the ease and speed of exchanging money for any other product at a price close to the market.
- Instrument of payment - upon repayment of debt and other obligations. According to some economists, the line between the means of circulation and payment is very arbitrary and therefore these functions can be combined.
- Means of accumulation - the equivalent recognized by economic agentsvalue stored for subsequent exchange for goods and services. Such equivalents of value can be not only currency, but also precious metals, stocks, bonds and other financial instruments. They can also be art objects, real estate and cryptocurrencies.
- World money - servicing the movement of value in the international economic turnover.
Bitcoin can do everything quite efficientlyThe five main functions of money. So, despite the relatively high volatility of the first cryptocurrency, it is in demand as a measure of value and a means of circulation in Venezuela, suffering from hyperinflation, where the prices of goods can vary significantly even during the day.
As world money, BTC is used forremuneration of freelancers from various countries, being an alternative to slow, expensive, and sometimes inaccessible bank transfers. The function of the means of payment for bitcoin and other digital assets is developing along with the cryptocredit market.
Bitcoin is increasingly being used on darknet. According to Chainalysis, in the first half of 2019 alone, about $ 515 million in BTC was spent on illegal trading floors. Analysts say that the largest illegal marketplace today is Hydra, and the most sought-after product is drugs.
It is noteworthy that at such sites, bitcoin was ahead of the anonymous cryptocurrency Monero, which is often accused of being the main tool for conducting illegal operations.
The first cryptocurrency can serve as excellentinvestment portfolio diversification tool. In addition, over the years, the price of bitcoin has been growing, therefore, cryptocurrency can be a means of accumulation.
The value of money as a medium of circulation isin their purchasing power. The latter is not necessarily determined by the actual value (for example, gold from which money is made or for which they can be exchanged under the gold standard) - it can be determined by the trust of the money holders.
No wonder that in the sameDue to the political and economic crisis in Venezuela, the trading volume on the LocalBitcoins p2p platform is growing rapidly - in all probability, many see the first cryptocurrency as an acceptable alternative to the depreciating bolivar or the “oil-rich” El Petro.
Modern Monetary Policy and the Gresham Law
English financier Thomas Gresh in the sixteenth centurynoticed that when the content of valuable metals in coins decreased, while maintaining the same face value, previously issued money quickly went out of use.
Based on his observations, Greshformulated the rule: "The worst money is ousted from circulation by the best." By good, he meant money whose intrinsic value is higher than either face value or bad money in circulation with equal face value.
People prefer to keep “good” coins by paying “bad” ones. As a result, “expensive” money is being squeezed out of circulation.
In modern conditions, many developed countries resort to the policy of "cheap money", trying to revive business activity and make exports more competitive.
Such policies flood the market with money and,therefore, leads to currency devaluation and ultra-low or even negative interest rates. The significance of the function of the means of storing value in fiat currency is reduced, as well as its purchasing power. The level of public confidence in the authorities, in fact, engaged in the destruction of coins, just like in the time of Gresham, is also falling.
No wonder that in terms of monetaryThe expansion of the population is looking for alternative ways to maintain value, preferring deposits to more profitable stocks or bonds. This can lead to bubbles in the financial market. Soft monetary policy does not ultimately prevent, but only exacerbates crisis phenomena, lengthening the economic cycle.
Many who understand this diversify the portfolio with protective assets, including bitcoin, which has recently become more closely correlated with gold.
The stereotype that printedthe machine is used exclusively by the central bank, which almost uncontrollably issues money. In fact, the bulk of the money supply is generated by commercial banks due to partial reservation and the multiplier mechanism associated with it.
The fact is that attracted in the form of deposits tocredit institutions deposit funds with the central bank in accordance with the required reserves ratio (in the Russian Federation, for example, it is 4.75%). Commercial banks may issue the remaining funds in the form of loans, as well as invest in securities.
Subsequently, money spent in this wayare deposited in another bank, thereby creating new deposits and allowing them to be issued on credit again. Thus, the money supply is gradually increasing, which in most countries exceeds the monetary base created by the central bank.
Drawing a parallel with Bitcoin again, we note thatCryptocurrency-based lending is developing rapidly. Such loans are usually highly secured, that is, the amount of the collateral exceeds the amount of fiat money borrowed.
Therefore, the liquidity risk of cryptocreditorganizations significantly lower than that of the financial institutions of the traditional market. This has a positive effect on the cost of borrowed money, which also depends on the risks of default on debts.
However, unlike traditional, onthe cryptocredit market has not developed a deposit insurance system. In addition, companies working in this market do not have the opportunity to contact a lender of last resort (in the traditional market - this is the central bank) in case of problems with solvency.
The credit market is an important source of resources forany industry. Cryptocurrency lending is rapidly developing and is in great demand, since it makes it possible to borrow and invest at an acceptable percentage without unnecessary bureaucracy. Such services can be especially relevant for investors in a bear market - when you need money, but do not want to sell digital assets at a bargain price.
Advantages and disadvantages of bitcoin compared to fiat money
Of the main the benefits The first cryptocurrency can be noted:
- Hardly limited emissions. Bitcoin supply is limited to 21 million coins,of which more than 85% have already been mined. Thus, BTC is almost the rarest asset on Earth. In the long run, its price will increase subject to constant or growing demand. Therefore, bitcoin can perfectly serve the function of preserving value, especially if the investment horizon is measured over the years.
- Extremely low and predictable inflation. This property is closely related to the previous one. The current inflation rate of BTC is 3.79%, and after the May halving it will fall below 2% (in the currencies of most countries this indicator is slightly higher).
- Lack of central control. Bitcoin's stability follows from this property.censorship and voluntaristic manipulation of its various parameters; anyone can make transactions and store value in BTC without any permission to do so.
- Low transaction costs and reasonable payment rates. These properties are especially relevant for those whocarries out cross-border transfers. Lightning Network technology is designed to increase speed and reduce the cost of payments, as well as solve the problem of scalability of the BTC network.
- Transaction Security and Irreversibilitynot involving disclosure by the parties of sensitive information. The irreversibility property, in particular, protects sellers from losses due to fraudulent chargebacks.
Of disadvantages BTC can be distinguished:
- Low cryptocurrency adoption. Many people still consider bitcoin as something frivolous and highly speculative, not appreciating the advantages of decentralization, the strength of cryptography and the potential network effect.
- High volatility. Bitcoin price swings stillquite high, but the indicator is characterized by a long-term downward trend. So far, significant volatility may repel conservative investors who prefer low-income and least risky assets.
- In various countries, operations with bitcoin are prohibited or significantly limited. The actions of regulators often create barriers to the massive adoption of cryptocurrencies on a global scale.
- The deflationary nature of bitcoin can be likeadvantage and disadvantage. The concentration of BTC in the wallets of large investors increases over time. Consequently, growing demand with limited supply can cause an exponential rise in price. However, if at some point a lot of whales lock in profits, the price of Bitcoin will collapse.
- Transaction irreversibility can also bea significant problem, especially if there are risks of non-fulfillment of the agreement. For example, if you do not receive goods from the online store, there is no guarantee of a refund. When paying through VISA or MasterCard, the customer can use the chargeback procedure.
- Only the owner of the coins can put signtransactions and spend money from your wallet. However, the loss of a private key means the loss of user access to funds - this is the flip side of financial sovereignty. In traditional finance, for example, a lost credit or debit card can be immediately blocked, avoiding the loss of money.
Thus, bitcoin differs significantly from inflation-priced fiat currencies, the value of which depends on the central authorities and public confidence in them.
Addresses, transaction volume and bitcoin volatility
Digital assets are increasingly concentrated inwhales, the number of bitcoin addresses with a balance of more than 1000 BTC updates historical highs. For example, 42% of the total Bitcoin supply is in the hands of investors holding between 1,000 and 1,000,000 BTC. For comparison, at the end of 2017, this indicator was 37.9%.
The number of addresses with 1 BTC or more is growing steadily, according to Glassnode:
“This steady growth is the result of the accumulation of retail customers”, - Connor Abandshine, an analyst at Digital Assets Data, said.
The expert emphasized that such dynamics may indicate the adoption of bitcoin as a means of preserving value.
The graph above shows that the upward trendcontinues despite significant fluctuations in the price of digital gold. This behavior of investors is also characteristic of the gold market - the attractiveness of this protective asset is always high, regardless of short-term fluctuations in its price.
The number of addresses with a non-zero balance is also increasing - as of January 21 there are 28,351. The previous record was recorded on January 11, 2018 - 28,190 such addresses.
However, we note that the growth of this indicator does not necessarily mean an influx of new investors. One market participant can store 1000 BTC, for example, for 1000 addresses.
Digital gold subsidence primarily in whalesmay indicate an influx of capital and the confidence of large investors in the long-term prospects of the first cryptocurrency. On the other hand, the question arises as to how good Bitcoin is as a means of circulation. To find out, you need to evaluate the transactional demand for it.
In 2019, users transferred $ 673 billion on the Bitcoin network, which is 11% less than in 2018:
Thus, last year the amount of transferred value decreased by more than 10%. On the other hand, this figure is four times the total transaction value from 2009 to 2016.
Researchers at The Block note a close correlation between the volume of on-chain transactions and the price of bitcoin and trading volumes:
This, the Block researcher Larry Chermak is sure, indicates that Bitcoin and other popular crypto assets are primarily tools for speculation.
Given the rather active beginning of the year, it is hoped that transactional activity will continue to grow. However, this requires a confident market recovery after a six-month downtrend.
Arcane Research Analysts Recognize GrowthBitcoin onchain activity at the beginning of the year. So, during the second week of January, the volume of transactions increased by almost 5%, and the total amount of the transferred value - by more than 25%. Miner commissions grew by 43%, and the number of active addresses increased by more than 7%.
Against the background of the recent revival of market and chain activity, the indicator of bitcoin volatility increased by 3%, interrupting the downward trend that has continued since August:
The CoinMarketCap service report says thatAmong the first five most capitalized crypto assets, Bitcoin volatility is the lowest. However, in comparison with traditional assets and world indices, the range of BTC price fluctuations is still noticeably higher:
Thus, related indicatorsprices, transactional activity and trading volume rise almost simultaneously in the bull market and together fall against the backdrop of a recession. At the same time, an increase in the number of addresses and the concentration of capital in whales occur even during a bear market. Therefore, bitcoin is more often in demand as a means of preserving value.
Fair value of bitcoin as a medium of exchange
As already mentioned, the medium of circulation is one ofmain functions of money. The market value of bitcoin and the volume of transactions are very closely correlated. Consequently, the price of digital gold is significantly dependent on transactional demand, that is, use for everyday operations, including the purchase of goods and services.
Byte Tree Service Calculates Fairvalue ”of bitcoin based on the ratio of market capitalization to transactional activity (NVT Ratio). According to the data of this service, bitcoin is overvalued by 51.6% as of January 24, 2020:
With the development of the Lightning Network and Liquid, on-chain indicators are likely to lose value. However, so far the activity in the second-level network and sidestream from Blockstream is low.
Low transaction demand at a relatively high price is another confirmation that stock speculations are still the main bitcoin username.
Compared to fiat money, the firstThere are advantages to cryptocurrencies, but there are also some disadvantages - high volatility and still low acceptance at the global level. Probably, not everyone likes decentralization, as well as the irreversibility of transactions and financial sovereignty associated with it, which implies full acceptance of risks and security issues.
So far, the first cryptocurrency is being usedmainly for the long-term preservation of value and for purely speculative purposes, designed for the short and medium term. At the same time, bitcoin is gaining popularity among whales, as evidenced by an increase in activity on the CME and Bakkt exchanges.
Given the ratio of market capitalization tothe volume of transactions, bitcoin is greatly overestimated as a means of circulation. Consequently, most investors see BTC as a means of maintaining value or as a purely speculative asset. Evidence of the first is the concentration of large amounts in large wallets and an increase in the number of addresses of 1 BTC or more, and the second is the rapid development of the derivatives market and still considerable trading volumes in the spot market.
In the long run, the price of bitcoin will bedepend on how well it performs the basic functions of money. If digital gold is universally accepted as a medium of circulation and its volatility is acceptable in order to fulfill the functions of accumulation, the market will appreciate it.