Contrary to what some tech enthusiasts would have you believe, cryptocurrencies, like other currencies, are just another traded commodity.
It hit me at a product launch by Humaniq, an application seeking to end the problem of financial inclusion – starting in Ghana – by banking the unbanked on an application built using blockchain technology. For those unfamiliar with cryptocurrencies, they are digital or virtual currencies that use cryptography for security.
The beta product is meant to help anyone, say an average street hawker, easily send, receive, and request funds commission-free using tokens on the platform. Great news if all your transactions are with tokens, but it obviously doesn't cover all the bases.
Perhaps the most appealing feature of cryptocurrencies is that they are decentralised. To see why, consider a digitised version of the Nigerian naira: it would still include access from any part of the world with connectivity, prevention of fraud and theft, immediate settlement and lower fees. But even a digital naira would not be decentralised.
Cryptocurrencies are decentralised because there is no central point of control: no central repository of information, no central management, and, crucially, no central point of failure (usually central banks). They are neither issued nor governed by a central party, and they remain agnostic to your geolocation and transaction volume. It means that you own the currency, free of censorship or discrimination, and no entity can take it away from you. Another way to see it is that no one controls the supply of cryptocurrencies or retains information relating to who is transacting with them.
Ironically, decentralisation is the precise feature that makes cryptocurrencies as similar to commodities as to currencies.
My “aha!” moment
Let's go back to the digitised naira. If it gave me global access, prevented fraud and theft, and could immediately settle any payment at lower fees, why would I want to hold Bitcoin or Ether? As a store of value? Perhaps. As an investment, certainly. I could definitely hold Bitcoin as protection against potential naira depreciation or unfavourable monetary policy. And if I considered the Nigerian stock market to be overvalued right now, cryptocurrencies are an attractive investment option right now. Finally, I may be concerned about Nigeria's rising debt levels so could seek to hedge my naira position. Worst of all, I could just be a speculator! Starting to see a similarity?
You should. The situation is similar to 2011 when the price of Gold peaked around $1,900 per ounce. With rising debt levels following the economic crisis, global jitters about investing in the stock market pushed investors into seeking safe havens. Throw in demand from Asia and speculators around the world, and you had a perfect cocktail to rally Gold prices.
Similar influences have led the current appeal of cryptocurrencies, but the focus of the market has been on how it would replace the current fiat system of currency exchange.
This is wrong.
It is hard to distinguish a commodity from currency, especially when it is increasingly convenient to use the commodity as a currency – as is the case with cryptocurrencies – but turn the clock back to a time when we used a commodity money system based on Gold, Silver or Cowries and you can spot the similarity. Under the Gold Standard, for example, the quantity of money was not subject to government manipulation because Gold had an intrinsic value and crucially, its supply could not be directly controlled. You may wonder, does a Bitcoin have intrinsic value? Naturally, yes. Like Gold, we collectively determine whether a commodity has intrinsic value when we choose to use it as a store of value. It could be due to its durability, rarity, usability, appearance or the fundamental technology behind it. The point is, if we as a society say it has value, then it does.
Commodity or currency, does it matter?
Yes, because it matters how you sell it to the average chap. Telling the street hawker that a cryptocurrency is an alternative currency to carry out his trade in is not, in my opinion, quite right. There is an expectation that comes with promising a currency, and I believe that is a reasonable level of certainty or control. Fiat money has been accepted as the norm arguably because it offers some degree of certainty when done right. This is precisely why competent central banks broadcast their monetary policy plans in advance – it gives us the opportunity to adapt if we can and avoid abrupt changes in currency valuation.
Cryptocurrencies do not offer the same kind of certainty. That poor street hawker could wake up one morning only to realise that another faction of Ethereum has splintered and decided to create an alternate version that has “better” principles or features, sending the value of the Ether he holds into a downward spiral. That is the kind of market activity we expect from Gold because no one controls the supply.
With a central authority, you at least, rightly or wrongly, get someone trying to regulate the currency to suit or create the desired economic and political climates. Whether leaving this function to chance or perhaps, the market, is open to debate.
So please, don’t sell me Bitcoin, Ripple or Ether as a currency, they are just commodities like Gold or Silver.