Cryptocurrency: A Misnomer?

Many find it difficult to see the legitimacy of cryptocurrencies since they are entirely digital and are not backed by anything with intrinsic value. However, the need for a currency to be backed by something with intrinsic value is likely a fundamental misunderstanding of money, as the fiat currency we transact with every day has not been backed by anything with intrinsic value for many decades. Rather than thinking of currency as something that needs to have value inherent to itself, it should be thought of as a tool used for exchanging value. While the tool of choice has changed over time, currencies always tend to exhibit certain properties such as scarcity, divisibility, portability, durability, fungibility, etc. (Ammous, 2018). The tool that best embodies these characteristics will allow for the most efficient exchange of value and will subsequently gain widespread adoption. Thus, a currency need not have intrinsic value, its value is derived from its effectiveness as a medium of exchange.  

While cryptocurrencies do tend to exhibit some of the properties that are desired in a currency, and the initial implementation of blockchain was the creation of Bitcoin which was intended to serve as a medium of exchange, the use of blockchain to enable decentralized currency is but a single application in a world of potential use cases. The term cryptocurrency could be considered a misnomer as many of the most popular cryptocurrencies may resemble traditional assets more so than currencies. For instance, the fixed supply of Bitcoin makes it so scarce that it may act as a storehold of wealth similar to the role that gold plays. Rather than replacing fiat currency entirely, Bitcoin could simply serve as a commodity that maintains its purchasing power during periods of inflation when fiat can become devalued. Additionally, the native currencies of PoS blockchains such as Ethereum and Cardano can be staked to receive the transaction fees associated with the network. This means that these currencies have a revenue stream associated with them like traditional equities and could be priced based on their future expected cash flows.

The term cryptocurrency is just meant to refer to a medium of exchange native to a blockchain network that is secured by cryptography. Cryptocurrencies are used to denominate fees for transactions that occur on a blockchain and compensate those who secure the network (Cryptopedia Staff, 2021). The fact that the term cryptocurrency contains the word “currency” should not necessarily indicate that a cryptocurrency’s only purpose is to compete with or replace traditional mediums of exchange. Rather, the properties and characteristics of each cryptocurrency should be carefully considered to better understand the function that it might have in the broader context of global financial and economic systems.

Sources

Ammous, S. (2018). The Bitcoin Standard: The Decentralized Alternative to Central Banking (1st ed.). Wiley.

Cryptopedia Staff. (2021). Cryptocurrencies vs. Tokens: Digital Assets | Gemini. Gemini. https://www.gemini.com/cryptopedia/cryptocurrencies-vs-tokens-difference#section-what-is-a-digital-asset

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