Home / Money / Personal Finance /  Here are five problems with bitcoin that will cause it to fail eventually

I’m not saying that cryptocurrencies will fail. In fact, it is quite obvious that the future of currencies is digital and crypto is simply a particular way of operating a digital currency.

I’m saying that bitcoin will fail. I have seen articles that use bitcoin and cryptocurrencies as synonyms, but that’s a mistake. There are thousands of cryptocurrencies and bitcoin is just one of them. It is the earliest one, so it is the most well-known, but I believe there are serious problems with bitcoin that will cause it to fail. Here are the top reasons.

There is no real value

Some people say that fiat money (which are the normal currencies that we all use today) also does not have real value since we moved out of the gold standard. This is incorrect. Fiat money has the value of the guarantee of the government that issues it. In fact, on the Indian rupee note, you will see a “promise to pay the bearer" issued by the RBI governor. In the US dollar, you will see the words “legal tender", which means the same thing. Governments have the power to tax their people and businesses, the ability to sell public assets, issue bonds and other ways to guarantee their currencies. These are formidable powers that give the confidence that the value of the currency will be there.

Stocks have real value because of the companies’ ability to create profits from the goods and services that they sell. Commodities have real value because industries purchase them as raw materials to use in the production of goods and services.

The only value that bitcoin has is in somebody else willing to pay a price for it. In that sense, it is like a piece of artwork. But even a piece of artwork has the ability to beautify the space that it occupies. Bitcoin doesn’t even have that.

There is no stabilizing force

Fiat money is heavily defended by the government issuing it. Central banks go into the international monetary markets to perform “market operations", which is to buy or sell their national currencies in order to keep them stable. Without stability, a currency does not work.

Bitcoin’s volatility makes it a terrible currency. It doesn’t matter how many vendors profess to accept it. Just think of it this way: if you have bitcoin, will you use it to purchase anything? You won’t. You would just use fiat money. That is because you didn’t buy bitcoin to use as a currency. You bought it as a speculative investment hoping that it would go up in value. You wouldn’t pay in bitcoin because your fear is that two weeks later, bitcoin’s value goes up by 20%. For the same reason, when bitcoin starts to slide, vendors will stop accepting it as payment, because they don’t want the value to go down by 20% a week after.

It is in competition with national currencies

Supporters of bitcoin say that it will replace fiat money. If this has the remotest possibility of becoming true, it means that bitcoin is in competition with national currencies. Can we really imagine the central banks of China, the US and the EU saying “let’s cancel our currencies and just use bitcoin, which no one can control"? This would be fatal to their monetary systems! As we have seen in recent days, China has banned bitcoin trading and mining. Various other countries have also hinted that they would be following suit. So no, countries will not adopt bitcoin. They will issue their own versions instead and then ban bitcoin.

Investing in bitcoin is not investing in blockchain tech

There are cryptocurrencies, known as stablecoins, which are backed up by real assets (such as the US dollar) that use the very latest in blockchain technology. These coins are much more suitable to be used as currencies because they only fluctuate as much, or as little, as their underlying assets. So again, no, nobody is buying bitcoin because of its blockchain tech because there are better options available.

Bitcoin is a utopian dream

Why are prominent people buying bitcoin if it has so many problems? Some bitcoin supporters have the vision of a future where currencies are fully democratized and not controlled by governments. I am not confident that this future will come based on the reasons above.

The massive amount of liquidity in the markets right now, from the monetary and fiscal policies of many governments to combat covid, is an important reason for the rise in the value in bitcoin. This is not sustainable over the long term.

Whatever other advantages that bitcoin might have over fiat money, such as speed of transactions, will be eroded when fiat money becomes fully digital.

Moh Hon Meng is co-founder, iFAST Group.

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