When the rate of Bitcoin decreases, predictions that the cryptocurrency is in for a "total collapse" multiply like mushrooms after a shower. The winner of the Nobel Prize in Economics Paul Krugman did also forecast the same outcome. The expert says that the problem of Bitcoin is that it does not have backing, although, in fact, this does not prevent an increasing number of people from being interested in buying it.
Krugman gives an example with a hundred-dollar bill, which, in his opinion, is secured by the fact that there are money denominations of a smaller scale, and besides, there is a force that will convince anyone that the dollar is a secured monetary asset.
Sharmin Mossavar-Rahmani, the head of the investment block of Goldman Sachs, has a similar attitude toward cryptocurrencies, stating that they did not perform any function of money, that is, they do not represent a value that anyone would like to save.
It looks unconvincing, although it is worthwhile to figure out whether it is necessary to provide backing at all. Krugman believes that digital assets have nothing of value but "self-fulfilling expectations." In fact, what Krugman means is the faith of investors that cryptocurrencies will transform the existing world financial system for the better. At the same time, if the information is a "new oil,” the computer calculations, thanks to which the cryptocurrency is mined and the blockchain is allowed to work, is the "new steel,” whose value is clearly far from zero.
The question of whether the price of Bitcoin is justified can be considered practically solved for a considerable number of investors. If it were not so, then it would be unlikely that five percent of Americans, according to a poll by Bankrate.com, would say that they intend to invest in cryptocurrencies for a long period of 10 years or more, that is, to open a kind of deposit, but without a bank, intending to continue to live on the income received when they become seniors.
Another study complements the previous, showing that 40 percent of Americans between the ages of 18 and 37, that is, the millennials, noted that they currently own digital assets. This shows that cryptocurrencies are already creating real competition to conventional money, which is recognized by Bank of Canada analyst Mohammad Davoodalhosseini. In his recent research, he proves that the effectiveness of transactions, which is visible when using cryptocurrencies, is that inherent value, the "backing,” which makes them a more profitable medium of exchange in the eyes of consumers compared to traditional money.
Moreover, the specialist from the Canadian banking regulator believes that if usual money is replaced by cryptocurrency, there will be a noticeable increase in the population's welfare. He made calculations based on the U.S. and Canadian economies and took into account the positive impact of technologies that bring cryptocurrencies to the community. Davoodalhosseini concludes that the withdrawal of ordinary money from circulation is not only desirable but also necessary, because according to his financial model, the existence of two monetary systems, both conventional and inconventional, will hinder the economic growth of the aforementioned countries.
With this approach, the question of the "necessity" of securing cryptocurrencies with something disappears by itself, and the phenomenon of "stablecoins,” or cryptos whose value is tied to an asset, is already being painted in a different color. The known "stable cryptos" Tether and TrueUSD, which allegedly are backed by the U.S. dollars, can be exposed to all those risks that are associated with the American currency. Unlike Bitcoin, the issuance of the U.S. dollar is unpredictable like the behavior of the U.S. Federal Reserve, which has repeatedly changed its policy, refuting previous promises and forecasts. The rate of the U.S. dollar, which last year lost 10 percent of its value to the euro, went in the opposite direction this year, but how long this growth will last and what will happen next is unknown. Weaknesses were also found in other assets, which some cryptocurrencies are being used to "strengthen.” The Venezuelan El Petro, tied to the price of oil, which, expressed in unstable U.S. dollars, can follow the price of this raw material, which has long been experiencing unpredictable fluctuations.
Weaknesses can also be found in cryptocurrencies which are being "backed up" with fiat other than the U.S. dollar, such as the EURS project, which is secured by the euro. There are risks associated with the fact that, together with possible tightening of cryptocurrency regulation in the eurozone, all the difficulties that will arise in this case will be particularly pronounced in such cryptocurrencies. Trying to back up decentralized cryptocurrencies, which are based on blockchain, by using centrally-released and controlled assets looks rather strange, but there are still ongoing attempts.
In addition, the projects on the launch of KAU and KAG cryptocurrencies look sad, as they are supported by physical gold and silver respectively. It is enough to look at the price dynamics of these precious metals over the years to be convinced of their strong price variability and the absence of an opportunity from such assets to guarantee permanent and stable growth for investors, something that Bitcoin already offers with a limited quantity and decentralized operation, and since the year 2009, the cryptocurrency has shown constant growth in annual terms.
In the case of gold and silver, the volumes of potential production and supply of these assets on the market remain unknown. One of the worst ways of supporting cryptos is, for example, with diamonds. In this sense, one cannot agree with Charlie Lee, the founder of Litecoin, who compared the XRP (Ripple) cryptocurrency with the precious stones market. Lee says that the volumes of Ripple emissions and the number of precious stones in the market are controlled. If it is possible to imagine how many of these cryptos there will be on the market in the case of XRP, however, then the situation with diamonds is difficult, as no one can know for sure what their supply on the market is, as it is subject to independent verification, taking into account, among other things, the fact that significant volumes are bought from the market by individual states to prevent the risk of reducing the value of these assets.
The attempt to "strengthen" some of the cryptocurrencies seems pointless, especially for those whose reputation, as with Bitcoin, has already been formed over the years. The price of Bitcoin demonstrates downs and ups, but not signs of panic, in contrast with all other investment assets that have repeatedly faced panic sales in history. Recognizing cryptocurrencies as a modern form of money is the fate of not just crypto enthusiasts. Roland Stadler, senior manager and data specialist of one of the world's leading audit companies, PricewaterhouseCoopers, is confident that Bitcoin serves as a payment medium and also provides a technology platform for making payments. Jim Epstein, after reviewing two books on cryptocurrencies in the influential American conservative magazine The Reason, states that "the invention of Satoshi Nakamoto may be the best form of money that could be invented."
The desire to "foist" some kind of backing or the value of a particular cryptocurrency is an indirect recognition of the supporters of this idea that cryptos are unstable without this. They then converge, however. with those who do not believe in cryptocurrencies. For example, Eric Budish, professor of economics at the University of Chicago, assures that "investors in gold need not worry that Bitcoin can replace it." The very attempt to dispel fears already shows that fears, first, already exist, and banks that manage large amounts of gold are especially worried about their fates. And secondly, these fears have grounds. And what is curious, Budish brings the following argument as proof of the correctness of his thesis: the dollar volume of gold reserves in the world is $7.5 trillion, which is more than 50 times higher than the capitalization of Bitcoin.
Marketwatch tells us that "the entire crypto market costs only a fraction of what gold is worth." But, firstly, as the head of Bitcoin Suisse, Niklas Nikolajsen, notes, “one percent of the cost of all gold in the world is already a lot." And secondly, if we look at this fact from the other side: is not such a high capitalization of the gold market, as well as securities and derivatives, a sign not of their sustainability but, on the contrary, that they are simply huge "financial bubbles?”
When, on July 25, Facebook lost $150 billion of its capitalization in a few hours, was this not a powerful signal indicating the instability of the modern financial market, the signs of which are only beginning to emerge? In Hong Kong, according to a survey conducted by the local blockchain association, 46 percent of the population expects a crisis within the next 12 months, and half of them intend to reduce risks by investing in cryptocurrencies. Billionaire Bill Miller, who spent most of his fortune (about a billion dollars) on investments in cryptocurrencies, is confident that Bitcoin will become the new money and replace gold, fulfilling the function of a world reserve currency, the one currently being implemented by the U.S. dollar and some other currencies.