Will cryptocurrency become reserve?
Stability – the path to the reserves
Before beginning the discussion on probability of bitcoin and altcoins arrival in the central bank savings, it’s necessary to understand what the reserve currency is and how it differs from other currencies. As economists write in their publications, the reserve currency consists of some state’s currency units used by the world’s central banks to collect gold reserves.
The currency can become recognized as a reserve currency if it has the following properties:
- stability (this means its exchange rate fluctuations must have minimal funds loss risks);
- free conversion (when changing the currency for other currencies is easy);
- the economy of the state issuing the reserve currency must be a considerable share in the world economy;
- the market of the state issuing the reserve currency must be developed.
Now let’s try to apply these reserve currency characteristics to cryptocurrency.
| Property | Does the cryptocurrency meet it? |
|---|---|
| Stability | At the press time, cryptocurrencies are not stable due to high quantity of market speculations. This problem might take care of itself after the initial hype around Bitcoin and altcoins ends. |
| Free conversion | Special exchange services already allow to get cryptocurrency for fiat money, however, the lack of corresponding legislation often makes the reverse change more difficult. |
| Big issuer state share in the world economy/Issuer state market conditions | Cryptocurrency consists of crypto units not issued by certain states, but produced by miners of various countries. In case cryptocurrency becomes widely recognized on the international level, its scale could meet these two requirements. |
Table – Does cryptocurrency meet the reserve currency requirements?
The table above demonstrates: today, cryptocurrencies do not meet the reserve currency requirements. Furthermore, cryptocurrency does not even have the legal recognition as a currency unit due to the lack of corresponding legislation.
Let’s ask experts what they think on the potential of cryptocurrency arrival in the reserve savings of the states of the world.
Who believes in the bright future of cryptocurrency?
It is noteworthy that the opinion of a specialist about the probability of any cryptocurrency to become the reserve currency usually correlates with the sphere this specialist works in. Many cryptocurrency community representatives believe that Bitcoin and altcoins have all chances to become yet another state savings component.
Kirill Suslov, the founder of TabTrader and CEO of FINOM, notes that Bitcoin is already used as a reserve by private investors and funds, just like gold.
“If we carefully look at the behavior of dollar, gold and Bitcoin, we will see that technically, Bitcoin is already demonstrating the properties of reserve currency, and news on the dollar weakness usually stimulate the growth of Bitcoin”, notes Alexei Yurov, the senior partner of Tokenadvisors and the Rospatent digital economy work group coordinator.
Eduard Lanchev, the CEO and founder of FUNDERY thinks that the future for reserve currencies is to take the form of cryptocurrency. However, according to his opinion, there is yet no real cryptocurrency, or the cryptocurrency fully meeting the decentralization requirements. “We believe that a real cryptocurrency is not what some states’ central banks are now trying to create. A real cryptocurrency is, in our view, out of any boundaries and is not controlled by anyone. In this regard, even Bitcoin is not a real cryptocurrency, as now it’s controlled by large Chinese and American mining pools,” the expert added.
What do skeptics say?
The overall sentiment of professional financial community towards cryptocurrency is more skeptical. For instance, Oleg Bogdanov, the head analyst in Teletrade Group believes that cryptocurrency has no chances to become a full-fledged currency, not to mention the probability of becoming a reserve one. ”First of all, the decentralization of currency system complicates the monetary regulation based on traditional stats – inflation, the GDP, money supply etc. Secondly, a cryptocurrency, and the reserve cryptocurrency even more likely, will lead to big capital flight from banks and this, in turn, will hurt the economy. Thirdly, there is no sense replacing a thing that works much better – fiat money and cryptocurrency payments. No economical reasonableness, only serious threats,” the expert thinks.
On top of that, the size of the cryptocurrency market is so small that any discussions about Bitcoin and altcoin possibility to become reserve currencies are premature. “Yes, I think this is possible [NB: cryptocurrencies as reserve currencies], but it’s too early to discuss this. The overall capitalization of cryptocurrencies is $150 billion, which is in fact not comparable with reserve currencies. This is possible only if the capitalization grows 10-20 times larger,” states Sergey Sergienko, the crypto investor, founder and CEO of ChronoBank, a blockchain company.
At the current stage of global market development, Bitcoin and altcoins cannot compete for a place of reserve currency. Although one might envisage that the arrival of cryptocurrencies itself, including the blockchain technology that serves as a base for digital currencies, can transform the existing public and economic ways and make cryptocurrency a key world currency.