Cryptocurrencies make good currencies, but fail miserably when trying to achieve the status of money.
Cryptocurrencies are both created and held electronically inside a virtual wallet. These digital currencies use encryption techniques to regulate the generation of new units and to verify the transfer of funds. Cryptocurrencies operate independently of governments and are decentralized.
The most popular cryptocurrency now is Bitcoin. Bitcoin has risen in popularity because, unlike government-backed fiat currencies, it has a finite number of coins–21 million, 15.5 million of which are currently in circulation–and user transactions remain anonymous. Thus, the argument goes, it is superior to the fiat currency system and a viable replacement for precious metals because of the limited supply, anonymity, and independence of central bank authority.
Cryptocurrencies are driven by a technology called Blockchain that allows for the transfer of stocks, bonds, property rights and digital currencies; directly, in real time, and with lower fees, because there is no middleman. The Blockchain technology itself is revolutionary and will make transactions more trusted, transparent and immutable.
While the technology driving cryptocurrencies is very interesting, the “coins” themselves are not equivalent with the Blockchain technology. Cryptocurrencies are simply piggybacking on the blockchain as they masquerade as real money.
To explain, we must first consider what the properties of genuine money are. First and foremost, money is a store of wealth. For centuries PM’s have been the premiere storage of wealth – they have no challengers in this criterion. In order to be a store of wealth, money must have intrinsic value. In other words, there needs to be a significant cost involved in the production of new money: such as labor, equipment, and energy expended. It costs about $1,000 to extricate an ounce of gold from the ground. Gold simply cannot be produced by decree. {It is crucial to note that while additional Bitcoins must be mined with great expense, the creation of new cryptocurrencies is fairly easy to accomplish.}
