The Motley Fool

5 Big Reasons Why Cryptocurrency Can’t Become a Reserve Currency

Investors are looking for a safe place to store their money – some elusive economy, market, industry, or currency that won’t lose significant value if the global economy becomes sluggish or tanks. Interest and investment in cryptocurrency has been growing for some time now, and its increasing use in consumer and international commercial transactions has led prominent observers to suggest that cryptocurrency is the future of money. But despite its positives, cryptocurrency may be unfit to serve as a reserve currency, because it lacks five key qualities.

Value

Since cryptocurrency has no stand-alone value, and isn’t not tied to anything in the physical world, its value can be anything, and it can fluctuate easily and greatly. While these arguments have been made about fiat currency, most fiat currency is tied to a nation, economic system, commodity, or other tangible things. The real-world things connected to fiat currency help to give it some real-world value and security, and to prevent it from significantly fluctuating on a regular basis.

Cryptocurrency’s value is based on how many people want it and the number of coins available. If no one wants it, it has no value. Also, it can be very easily manipulated by a small number of people who hold or control large amounts of it. Furthermore, rapid devaluation of cryptocurrency only affects the people who hold it and use it. People who are not engaged in commercial transactions using cryptocurrency may be indirectly affected, but in theory, their fiat currency protects them from the vagaries of the cryptocurrency market.

 Liquidity

Investors want a cryptocurrency that they can exchange for fiat currencies or precious metals. Without consensus on a cryptocurrency’s value, the holder risks being stuck with something that cannot be converted into real-world value.

 Stability

Cryptocurrency values have fluctuated more than any currency in human history. While there are always periods in which currency may be worth substantially less or more than it was in its recent past, reserve currencies don’t endure such strong ups and downs.

Numerous factors may affect a cryptocurrency’s value. Its holders should be aware of its demand, and how it fares relative to other competing cryptocurrencies. Sadly, they should also be aware of cryptocurrency scams, fraud, exchange problems, and hacker activities. Relative to fiat currency and precious metals, the valuation of different cryptocurrencies seems quite unpredictable and a terribly risky investment. Its lack of stable value means that its holders can never be certain about what their cryptocurrency may buy.

Acceptability

In Asia, especially Japan, retailers have been incredibly accepting of payments made using cryptocurrency. But in other parts of the world such payments are not as readily accepted, if they are accepted at all. Many western retailers are still uncomfortable with cryptocurrency payments. They fear that its volatility may render the cryptocurrency they hold worth significantly less than what they traded it for.

Widespread Adoption

The people buying cryptocurrency and using it in commercial transactions tend to be tech-savvy, under 30 years of age, middle class and above, and/or part of the segment of society rebelling against government oversight, intervention, and policing. Unsurprisingly, a huge percentage of society knows nothing about cryptocurrency and doesn’t use it.

Older people, poor people, working-class people, and people without knowledge of or access to technology must also embrace cryptocurrency in order for it to become a reserve currency. If they’re not included, they may develop informal economies, or resort to bartering goods and services, to substitute for cryptocurrency in everyday transactions.

So what now?

Cryptocurrencies continue to develop and resolve the issues that prevent them from becoming a reserve currency. In the future, it may be possible for a cryptocurrency to meet those high standards – but that time apparently hasn’t come yet. For now, it remains risky to use cryptocurrency as a hedge against currency devaluation or as a safe harbor in a financial crisis.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.