Putting the 'Currency' In Cryptocurrency

Today, ex-hedge fund manager Michael Novogratz offered his take on cryptocurrency in an interview with Bloomberg. Novogratz professed that cryptocurrencies are not currencies. His reasoning? Volatility.

“For something to be a currency, you need stability,” he said. “When you step back and walk away from the screens, [the] dollar-yen [exchange rate] has been plus or minus 15 percent for much of the last 15 years. The euro [has been] the same way.”

Volatility certainly impacts people’s confidence in an asset. That’s part of why our society differentiates between blue chips and penny stocks. Through the lens of stability, we’re able to understand which assets we can trust and which are more speculative in nature. But stability doesn’t tell the whole story.

Stability is a feature of a dependable currency, not all currency. Novogratz’s assertion is not entirely accurate, as evidenced by hyperinflation experienced in countries like Brazil and Zimbabwe, but he’s mostly right. It’s hard to predict how much a bitcoin will be worth an hour from now, let alone a week or a year down the road. On that basis, why would people spend their “digital gold?”

Noting bitcoin’s function as a “store of value” and the cap of 21 million units (notwithstanding hard forks like bitcoin cash), Novogratz suggested that the price of bitcoin will continue to rise. When interviewer Erik Schatzker asked, “how high?” Novogratz sighed and neglected to provide an estimate.

Analyzing attributes like the total supply, circulation, existence of a cap, and rate of issuance might provide small insights into the viability of a cryptocurrency. Additional factors might include the rate of coin destruction and the potential for market manipulation if an individual or group possesses vast amounts of the currency. Ultimately, in all its forms, money remains a collective fiction. While tokens on a blockchain like Ethereum may provide utility on a platform, it’s unclear whether non-fiat cryptocurrency will be sustainable in the long run, either as a currency or as a store of value.