- Cryptocurrencies can’t work as real currencies as they don’t provide stable stores of value, UBS’ chief economist said.
- People have “absolutely no certainty” of what they can buy with them tomorrow, UBS’ Paul Donovan said.
- The fundamental flaw is that there is no balance between supply and demand.
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Cryptocurrencies are unlikely to ever function as real currencies, according to Paul Donovan, chief economist at UBS Global Wealth Management.
“People are unlikely to want to use something as currency if they’ve got absolutely no certainty of what they can buy with that tomorrow,” Donovan said in a video this week.
“Proper” currencies should provide a stable store of value with the certainty that they can be used to purchase the same basket of goods today as they can tomorrow,” he said. “With bitcoin and other crypto, you don’t have that certainty because there have been repeated bouts of hyperinflation, and you can buy far, far less tomorrow than you can buy today.”
A fundamental flaw with cryptocurrencies, Donovan said, is that there’s no balance between supply and demand for digital tokens.
Central banks are able to reduce supply when demand falls for a proper currency, thereby maintaining both balance and spending power, he said. But when demand falls for cryptocurrencies, supply cannot simultaneously go down, causing the value and spending power to rapidly collapse.
Since cryptocurrencies operate under a fully decentralized system, there is no one authority that regulates its supply. It relies on developers and algorithms for the creation of new currency. This can create events where demand increases faster than supply, driving up prices.
The price of bitcoin has dropped 20% over the past week to around $32,177 following concern about an alleged double-spend. But bitcoin’s price drop will be used as a key buying opportunity by savvy investors, according to Nigel Green, CEO and founder of deVere Group.