Released on 11th February, a new report by US-based multinational financial services company JPMorgan issued a sharp critique of bitcoin and other digital currencies.
The eight-page report, authored by the company’s head of global FX strategy, John Normand, aimed to present the “risks and opportunities” posed by bitcoin.
However, throughout the text, Normand puts much of his focus on the former category.
Most notably, Normand suggests that bitcoin is “vastly inferior to fiat currencies” on several counts, and that it is unlikely to ever be afforded the status of legal tender by world governments. The later quality, Normand says, casts the most doubt on bitcoin’s future.
“As a medium of exchange, unit of account and store of value, it is vastly inferior to fiat currencies.
Since governments are quite unlikely to accord it the status of legal tender, bitcoin or other virtual currencies would not reach the scale and scope to render them worthwhile for widespread commerce, payments or investment.”
While Normand did acknowledge the appeal of bitcoin’s technology – pointing out that fiat currencies could learn from its innovations – he ultimately concluded that “bitcoin’s practical role may be no larger than that of an emerging market’s currency subject to exchange controls”.
Bitcoin as inferior money
Normand writes that there is much to dislike about bitcoin, first and foremost because it fails to meet traditional definitions of a ‘medium of exchange’ because it lacks a common power to compel its use.
“Recall that currencies don’t become widely used spontaneously or through a grassroots campaign. They become widely used nationally because a government declares them legal tender, and they become widely used internationally because they are legal tender in a significant economic area with large, unrestricted capital markets.”
Further, Normand suggested that, because of this deficiency, virtual currencies would need to be able to perform other functions more effectively than fiat currency as both a unit of account and a store of value, which he argues it does not.
Normand used bitcoin’s price fluctuations, which he described as “brutal,” as an example to prove his assertion. He cited the statistic that bitcoin’s volatility has averaged 120% over the last three years, while a typical G10 currency will range from 7% to 16%.
“Such price fluctuations make it impossible to seriously consider bitcoin as a unit of account or store of value for an material amount of corporate or investor exposure,” Normand wrote.
However, Normand did acknowledge that these “swings” may simply represent normal volatility for a startup currency, the same way startup companies in the 1990s saw strong fluctuations in share prices.
Bitcoin’s implications for investors and corporations
Normand opened this section of the report by noting that saving 1% on transaction fees would be an attractive prospect for merchants. However, he stated that such savings would not outweigh the risk of the currencies volatility.
Normand did not mention that major processors such as BitPay and Coinbase limit merchants from this potentially harmful exposure, as he suggested bitcoin would complicate a company’s cash and risk management.
As for bitcoin’s biggest benefit for investors, its potentially large long-term value, Normand suggested that the currency displays many characteristics investors usually shy away from, and further that there is simply not a sufficient way to assess what bitcoin’s future value would be:
“Fundamental exchange rate models cannot be constructed for similar reasons: there is no meaningful bitcoin economy on which to base productivity or terms of trade calculations.”
The author did indicate that he was able to see why people are attracted to the idea of a currency without the “alleged recklessness, capriciousness, siphoning and snooping inherent in the traditional financial system”, adding that there “is something” to the idea.
Additionally, Normand noted that fiat currencies can learn from some of bitcoin’s innovations. The currency offers predictable growth in the money supply and it eliminates the risk of capital controls. Bitcoin also provides verification of fund balances to avoid fraud and it reduces transaction costs.
“As fanciful – and indeed Matrix-like – as this bitcoin creation system sounds, perhaps it requires no more suspended disbelief than the traditional fiat system in which a government declares paper to have value and a central bank or national mint thus issues the specie. One doesn’t need to be the caricatured miscreant, Austrian economist or anarchist to appreciate the appeal of such a system.”
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