Mizuho daily – Of Coins & USD, why not all Coins are money

By Vishnu Varathan, Head, Economics & Strategy | Asia & Oceania Treasury Department | Mizuho Bank, Ltd.,

Of Coins & USD

A fairly lacklustre day, where the earnings boost of US banks, forged in cheap-liquidity fuelled global markets, failed to incite lasting positivity on Wall Street; as S&P500 slipped 0.4% even as Dow eked out a little under 0.2%. Nasdaq’s 1% drop though was newsworthy.

Specifically, markets appear to be transfixed by the $75.9bn listing of Coinbase on Nasdaq. And to be sure, the consequent ~14% drop in Coinbase’s price from $381 open to $328 close dragging Nasdaq, did not appear to make a dent on stoked crypto-currency optimists.

Meanwhile, UST yields edged higher with 10Y close to 1.65%, partly driven by;

i) a fairly sharp run-up in Crude prices (Brent up $2 at $66) as EIA upgraded global consumption forecasts;

ii) and Fed Powell’s allusion to taper “well before” rate hikes laying the ground for 2022 QE reduction.

Despite this, USD was softer, with EUR closing in on 1.20, AUD surging above 0.77, USD/SGD below mid-1.33 and USD/JPY pressured below 109 again (despite firmer UST yields).

Crypto-currency enthusiasts may muse that USD decline on the day of Coinbase’s debut on Nasdaq is poetic. Maybe so. But we contend that this is far from prophetic.

Why Not All Coins Are Money

Admittedly, Coinbase’s tremendous listing, despite post-launch fizzle, speaks to the euphoria about crypto-currencies; in particular Bitcoin and Ethereum, which dominate trades on Coinbase.

Crypto-Evangelists argue that the listing of the largest trading platform for crypto-currencies is a significant milestone, that imbues legitimacy to the idea behind crypt-currencies. This is in equal parts right and wrong, requiring that the the attributes of crypto-currencies (as a tradable commodity) be unbundled from its far loftier aspirations (to be money).

Arguably, Coinbase’s listing, launching the crypto-currency trading platform’s market cap ahead of Nasdaq and on par with commodities exchange ICE, is a price signal that crypto-currencies have not only gained recognition, but also attained desirability  to be traded and owned.

But to conflate that with cryptocurrencies’ emergence to supplant money is (Coin)base-less. Put differently, trading in Bitcoins can make you money, but that does not make it money.

We have detailed in the past why not all “coins” represent money. And we stand by this. For one, the wild fluctuations in prices mean that crypto-currencies cannot reasonably be used as a unit of accounting, which is one of the three key functions of money.

Second, it also falls short as medium of transaction given many barriers to wider adoption (for use); and this is despite its superior technology to lower transaction costs.

On this it is worth noting that the barriers are not all artificially erected or culturally impeded. Instead, what’s more poignant, is that block-chain technology is not intrinsic to particular crypto-currencies. And so, transactional advantages are not “sticky”, so to speak.

And finally, even on the last function of money as a store of value, crypto-currencies are wide of the mark. At face value this counter-intuitive given how Bitcoin is now over $60,000, but bear with me. A store of value goes well beyond price appreciation; just ask Dutch tulips. It requires that this store of value be backed by something realizable. Whether Gold, or the guarantee to make good (an IOU) one way or another. And that requires an identifiable central authority, the very “evil” that crypto-currency take pride in seeking to abolish.

And so, in their current form, and considering regulatory catch-up and technological advancement, crypto-currencies will “fall on their own sword” if it aspires to supplant money. All said, the bar to be recognized as money is substantially higher than it to qualify as an asset. Which is precisely what crypto-currencies are in their current form: an (alternative) asset.

Whether this is an asset with intrinsic value, without confusing it with the desirability of block-chain technology for its various applications, is another question for another day.

Source: Mizuho Bank Ltd