Bitcoin is not currency | Seeking Alpha

Over the years, I’ve written a number of articles on cryptocurrency, as I’m constantly troubled by the way Wall Street uses hard-to-understand speculative instruments to capture people’s investment dollars. Particularly disturbing to me is when I hear retail investors requesting the calls of the brokers who sell them this garbage.

I am probably too small to make a difference in the big picture, but as an analyst I feel it is my duty to correct misinformation. In my previous articles I explained how I thought Bitcoin (BTC-USD) would never generate a return on investment because it has no income and has no plans to produce income. I also described how investing in cryptocurrencies in no way gives the investor ownership of the underlying blockchain technology. Thus, no matter how useful or valuable blockchain ends up being, it does not add value to the crypto investment.

In the comments to each of these articles, one idea stood out as the primary criticism of my reports.

“You can’t analyze crypto like a stock. It’s a currency, not an investment”

Now THAT is a dangerous idea and one I feel compelled to correct, hence the subject of this article.

Currency vs money vs cryptocurrency

Currency and money have subtle differences that, depending on how one splits the hairs, can make certain things not qualify as currency or money. To be honest, currency has undergone many changes throughout history, so while crypto does not meet today’s definition of currency, the definition can certainly be changed to fit in. I am not here to argue semantics, nor is it relevant to the viability of the investment decision. to determine whether crypto technically meets the definition of currency or the definition of money.

You could see it anyway.

Instead, I will discuss how crypto is categorically not currency or money in its function.

How a real currency is used

Currency is a medium of exchange for goods or services. US dollars are currency because you can go to any store in the US and buy what they sell with your US dollars. The products the store sells are priced in US dollars and there is no need for conversion. Dollars are exchanged directly for the product. This functionality is the same whether you use physical US dollars in the form of coins and dollar bills or digital money via a credit card, Apple Pay, PayPal or any other form of payment.

It is a real currency. It is completely liquid and can be used on its own without conversion.

How Bitcoin is used

Crypto providers often refer to how it is increasingly being accepted as a form of payment.

• There is a famous early transaction where someone bought 2 pizzas with 10,000 Bitcoin.
• You can buy a Tesla (TSLA) with crypto.
• For a while, you could even buy a bucket of KFC (YUM) chicken with crypto.

However, if we examine each of these transactions in more detail, I think it will become clear that the currency used is actually US dollars, not crypto.

In each example, the number of Bitcoins is referenced to the current US dollar price of Bitcoin. The 2 pizzas cost 10,000 Bitcoin because 10,000 Bitcoin at the time was priced at $41 which is what the pizzas cost.

How many Bitcoins does a Tesla cost?

The answers are: however many Bitcoins equal the US dollar price of the tesla.

The items are not actually priced in Bitcoin. They are priced in US dollars and then the Bitcoin is converted to US dollars at a rate equal to the last trade.

This is no different than paying for an item with a different warehouse. Companies do this all the time. Adobe ( ADBE ) bought Figma using the stock. They issued the number of shares required to match the $20 billion price tag.

Analysts described the incident as Adobe using the stock as “currency” for the acquisition.

Sure, we could use that term for Adobe’s transaction or any crypto transaction, but I don’t think anyone actually thinks Adobe is a currency.

Likewise, cryptocurrency is not currency. You cannot buy things with crypto. You can only buy things with the dollar equivalent value of said crypto, while the seller knows they can immediately sell the crypto and convert it to dollars.

The fact that using Bitcoin to buy things requires referring back to the value (current price) in the actual currency (US dollars in America or Euros in Europe) has two important implications:

1. It is not liquid in terms of transactions
2. Negative consequences for crypto prices if they are adopted more widely

Liquidity as a central feature of currency

Cash is not a big investment. It will decrease in value over time with inflation and inflation occurs far more often than deflation.

However, the value of cash is its highest liquidity. If the stock market crashes or transactions freeze, you can still use cash to put food on the table or gas in the tank.

Currently, very few vendors accept crypto, but for the sake of argument, let’s assume the future where you can walk into a Kroger (KR) and use Bitcoin to buy groceries.

What do you think will happen to the ability to do such a transaction if the stock market freezes?

If the provider loses the ability to instantly convert that crypto back to dollars, they will stop accepting it. The crypto loses its liquidity at the time when liquidity is most needed.

Grocery stores in the United States universally accept US dollars, and they continue to do so regardless of market conditions. It is the supreme liquidity that gives cash its value, and why families are wise to keep emergency funds in dollars or whatever the country’s primary currency may be.

Negative consequences of crypto pricing if it ever becomes heavily transacted

Let’s imagine the future that crypto enthusiasts preach, where vendors generally accept crypto as a means of purchasing their products.

You go to the store and buy goods with crypto. The provider then collects their profit by selling that crypto and getting dollars, thus keeping the same profit margin as if you were to buy it in dollars.

At an individual transaction level that works.

Now consider all the vendors selling the crypto to get their dollars back. There is quite a lot of sales pressure. The more widely accepted crypto becomes for transactions, the more selling pressure there is on crypto prices.

Quite simply, trading in a “currency” that must be referenced back to the real currency is not a sustainable model.

What about a future where vendors price directly in Bitcoin instead of the dollar equivalent of Bitcoin?

In theory, it would be possible for Bitcoin to become a true currency with a similarly superior liquidity to the US dollar if suppliers generally accepted Bitcoin AND their goods were priced directly in Bitcoin.

I don’t mean nominally priced in Bitcoin like the Model S which costs however many Bitcoins equals $140,000. I mean truly priced in Bitcoin.

This would be where a sandwich costs a certain number of Satoshis (the smallest fraction of a Bitcoin) and the same sandwich costs the same number of Satoshis 3 months later regardless of what happened to the price of Bitcoin in the meantime.

I don’t think this future can exist.

As long as Bitcoin trades on the exchange, the price movement will allow arbitrage of any product priced directly in Bitcoin.

If Bitcoin’s market price went down, you could use it to get a really cheap Model S, and if Bitcoin’s price went up, you could return your purchase and get the upside.

That’s why vendors can’t price directly in Bitcoin and why Bitcoin isn’t a currency. It is just a speculative investment with no intrinsic value and no income. Caveat Emptor.