The original point of cryptocurrencies is contained within their name, that is, they are supposed to function as currencies that provide an alternative to the British pound or US dollar, rather than as a medium for speculation.
There are significant issues in the way of the acceptance of bitcoin and the altcoins (other cryptocurrencies) including:
- The inability to process a large number of transactions
- The psychology of the participants in the market
According to Garrick Hileman of the London School of Economics and University of Cambridge:
"Many things in blockchain land meet the definition of currency,” he said. "Cryptocurrencies such as Bitcoin and Litecoin do function as a medium of exchange, as you can buy things with them. They do store value from day to day, although they are very volatile and the fact that they can lose value so rapidly is a major question mark."
In order for a currency to become accepted by the public it must become the "unit of account", i.e. the accepted way in which goods and services are priced within an economy.
As most people would prefer to think of one currency in order to act as their everyday reference with regard to transactions, the multitude of cryptocurrencies make this very difficult when compared with an accepted, stable currency such as the pound.
However, the complexity of the cryptocurrency space may not be an issue for the bots & algorithms that may be the primary users of cryptocurrencies in the near future.
Over 50% of internet traffic is bots (automated processes), and these automated processes have different criteria by which the qualities of different cryptocurrencies should be judged than we would.
The volatility of cryptocurrencies is another barrier to their use as currency as most people do not view massive fluctuations in the value of the currency they wish to make purchases with favourably.
It is possible that one of the existing cryptocurrencies could solve the many contemporary issues and become a dominant, stable player in the market, or a new player could piggyback on the technology or ideas of an existing one, or come up with a revolution in it's infrastructure. However, no one cryptocurrency has managed to solve all of the problems necessary to replace current currencies.
Therefore, caution is needed until further developments reveal the full picture.
A sound financial plan eschews chasing short term gains in favour of long term, holistic planning, taking a reasonable amount of risk that is appropriate for the client and a sound overall strategy. Westminster Wealth Management can construct a plan that is right for you, without relying on fads or trends. Contact us today.
The value of investments and income from them may go down as well as up and you may not get back the original amount invested.
Information is based on our current understanding of taxation legislation and regulations which is subject to change.
Can Bitcoin or any other cryptocurrency actually work as money?