Crypto as currency? I don’t think so.

Cryptocurrency is a long way from replacing the dollar, but it isn’t going away any time soon.

An overwhelming fascination with cryptocurrency—sometimes simply referred to as crypto—has taken over the public imagination in the last few years. Names like Bitcoin and Ethereum that were once jargon for the tech-minded fringe now come up in common conversation and make headlines on a regular basis.

So what does the advent of cryptocurrency mean for our collective economic future?

Cryptocurrencies are virtual payment systems—alternative modes of currency that exist purely in the digital world. Crypto proponents tout these innovative systems as potential (if not inevitable) replacements for the standard government-issued currency we use today.

This would mark a seismic shift in our economy given the vital role money plays in our day-to-day lives. Money is the essential element that facilitates exchanges and serves as a common measure of value for buyers and sellers. We also rely on money as a store of value allowing us to plan and save for purchases in the future.

A wide variety of items can be used as currency to achieve the objectives of money. History has seen everything from gold pieces to seashells to little pieces of paper serve as currency for various societies.

While different currencies can exist, the effectiveness of what we use for currency can vary. Economics and common sense dictate that a currency ought to meet a certain set of criteria to be effective.

In trying to understand the impact crypto might have on our economic future, it’s useful to weigh cryptocurrency against the criteria for effective currency. Let’s take a look:

Portability. We expect currency to be portable so that it can be easily transferred in an exchange. Most cryptocurrency is remarkably portable given that crypto networks are peer-to-peer: any participant can transfer units to any other participant anywhere in the world at any time via the internet.

Durability. For currency to store value effectively, it needs to be durable and secure. Crypto’s digital nature prevents it from physical deterioration, and the encryption technology that cryptocurrencies rely on (known as blockchain) makes it remarkably secure for holders.

Divisibility. Currency needs to be divisible into sub-units to accurately reflect differences in the value in various exchanges. Cryptocurrency is nearly infinitely divisible—for instance, the penny of the Bitcoin world is 0.00000001 Bitcoin (which as of today is the equivalent of $0.0002).

Limited supply. To have any chance at holding value, the supply of a currency needs to be relatively limited—it doesn’t need to be in short supply, but new production does needs to be controlled. Cryptocurrencies are often established so that a limited amount can ever exist. Bitcoin, for example, is programmed so that only 21 million units can ever be “mined” into existence. Other cryptocurrencies address this in different ways with relative ease as well.

Stability in value. When it comes to currency, instability is bad. It takes away from the ability to function as money should—that is, to easily facilitate exchanges. If a currency is expected to lose value in the future, sellers might not be as willing to accept it in exchange for their wares. And if it’s expected to rise in value, buyers might not be as willing to part with it. Instability in either direction hampers trade.

Instability has proven to be the Achilles heel for crypto, limiting its viability as a genuine alternative to today’s currency. The dollar has seen some of its greatest instability in history recently, losing almost 10% of its purchasing power over the past year in the form of inflation. But this pales in comparison to the wild swings taken by the leading cryptocurrencies: in just the past two years, both Bitcoin and Ethereum have experienced swings of over 20% in value up or down—in a single day!

Crypto enthusiasts point to the development of so-called stable coins as the answer to this problem. Stable coins address instability by pegging their value to something more stable—in most cases, the US dollar. Whether these innovations can serve as the currency of the future is yet to be seen. The complex promise and problems of stable coins merit an economo post of their own.

Nevertheless, cryptocurrencies in the fashion of Bitcoin are highly unlikely to present a viable alternative to good old-fashioned dollars any time soon, if ever. But that doesn’t mean that they’ll be going away.

While crypto has yet to gain popular acceptance as money, it has proven remarkably popular as a speculative investment much like commodities or collectibles. People buy it in hopes that it goes up in value and they can sell it in the future for a profit.

Indeed, if someone bought Bitcoin or Ethereum in 2020 and sold it in 2021, they are likely to have made a handsome profit. But the 2021 buyer now has an asset in 2022 that’s worth about half what they bought it for. Should they hold it in hopes that it goes back up? Or do they cut bait and sell it to recoup at least some of the investment? Your guess is as good as mine—it’s mostly speculation.

There are also broader arguments being made about crypto’s potential to supersede the traditional international financial system to some benefit, especially with regard to people struggling in developing nations without access to reliable currency. This is yet another thread of the crypto conversation that deserves a post of its own, as the nuances here are anything but simple.

Stay tuned, more to come.