Cryptocurrencies have rapidly become a global phenomenon, captivating investors, economists, and governments alike. With Bitcoin (BTC/USD) and Ethereum (ETH/USD) prices skyrocketing, some experts are beginning to question the long-term effect of digital currencies on the global economy.
Economist Dieter Wermuth, partner at Wermuth Asset Management, cited Charles Kindleberger‘s “Manias, Panics, and Crashes” and Robert McCauley‘s assertion that cryptocurrency is the “most speculative asset ever invented by the human mind” in his Wednesday note to investors. Wermuth noted that several economists from the European Central Bank have raised concerns about the potential consequences of cryptocurrencies.
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Various economists have voiced their opinion that cryptos are not a viable substitute to regular money. Rather, they are seen as an asset without substance, a means for insiders to get rich quick, and a haven for shady activities like money laundering and tax evasion. What’s more, the IT systems powering the crypto ecosystem guzzle up enormous amounts of energy, contributing to climate change.
Contrary to the initial narrative that Bitcoin would be a better, more stable currency than traditional money, Wermuth noted that the cryptocurrency has failed to meet the three essential functions of money: as a means of payment, a unit of account, and a store of value. He pointed to Bitcoin’s volatility, slow and expensive transaction processes, and limited acceptance as reasons why it is an inadequate substitute for regular fiat currencies.
Furthermore, Wermuth remarked that Bitcoin is a poor store of value due to its lack of inherent value, no interest payments, and no promise to redeem the purchase price or nominal value. This makes it impossible to calculate a “fair” price, transforming Bitcoin into a purely speculative asset, he said. A lack of faith in its potential for price appreciation could make Bitcoin simply vanish, he warned.
From a macroeconomic perspective, Wermuth argued that Bitcoin and other cryptos are a “negative-sum game,” leading to a significant waste of resources. He cited the undesirable redistribution of wealth, the large profits made by those dealing in a fundamentally useless asset, the facilitation of money laundering and tax evasion, and the environmental costs associated with the IT systems as factors that result in a net loss for the economy.
Ultimately, Wermuth suggested that the global economy could be better off without cryptos, allowing for more funds to be directed towards consumption and investment.
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