Are cryptocurrencies really currencies?

Economist Jon Danielsson questions what these digital tokens are really doing...
06 April 2021

Interview with 

Jon Danielsson, London School of Economics


Gold bar


When Bitcoin was invented, its stated purpose was to provide a means of payment that doesn't rely on any person, state, or central bank to maintain it. But today, cryptocurrency investors buy the stuff in order to make money from speculation - far more often than they use it to pay for anything. As a result, economists are questioning what these digital tokens are really for. Phil Sansom and Eva Higginbotham discussed the subject, with help from the London School of Economics' Jon Danielsson...

Phil - Eva, I wouldn't blame you if all this is - economically - making your head spin.

Eva - It's just hard to imagine that all of this money - that doesn't exist in any sort of tangible, physical format - is also taking up not only a huge amount of energy, but there are whole organisations of people and researchers working on it. It's like a whole other world.

Phil - Yeah, and here's the thing: some economists don't even think it's money. There's actually a great example because when you showed me your Ethereum graph, you were like, "look how much I bought here, but I should have bought it here." That's not the function of money, is it?

Eva - No, you have money and then you buy stuff with it. You don't buy money with your money.

Phil - And here's the thing. Most people are not buying things with this cryptocurrency. They're buying it, to have it, to make money with it. Economist Jon Danielsson is the director of the London School of Economics' Systemic Risk Centre; he's been looking into this stuff. He told me he struggles to find a reason himself.

Jon - You can't take a Bitcoin, go to the pub and buy a beer, can you? You can't go to the supermarket. You're not paid in Bitcoin, you can't pay your taxes. And if you can't do any of the things you normally do with money, it's not a currency. It's something else.

Phil - I guess that's true. But I can't do that with like a Euro here in the UK either, and that's because the Euro has its place; and does Bitcoin have its place, which is the internet?

Jon - You can certainly buy things online, but that's highly restricted. You can buy a Tesla car with Bitcoin, but it has a high transaction cost, it takes a long time, and the fee you pay is much, much, much higher than you would pay by using your regular pound notes.

Eva - Well, I do know that if I want to take out my £14.44 of Ether, it's going to cost me money. And so, yeah - true.

Jon - If you buy stuff on the internet with Bitcoin, you end up paying so much for the privilege of doing it, that you're only doing it to show off - to show you can do it.

Phil - Are people actually using stuff like Bitcoin to pay for limited types of things, or is it just not getting used?

Jon - It is really hard to ascertain, but it's a tiny, tiny fraction of the overall volume of transactions. A lot of it is illegal, of course, but in the legal domain, it is so small it's almost negligible.

Phil - Is there a risk that we're coming from kind of a privileged country, you and I, Jon - or a privileged couple of countries - and if you're someone who's lived somewhere where you've seen a couple of political regimes come and go, that you think, "hang on a minute, this money that they're saying we should use doesn't seem all that reliable to me, I want my cryptocurrency"?

Jon - The example these people like to mention most often is Venezuela. And of course, what ends up happening in a place like Venezuela or Zimbabwe - another country with a badly managed currency - is that the US dollar ends up being effective currency. The US dollar is universally understood, universally known; everybody knows what it looks like. If you tried to explain to your mother what Bitcoin is, she might not get it. You tell her what the US dollar is - she knows.

Phil - So why on earth are people buying Bitcoin?

Jon - Because if you see something going up in price, you expect it to go up in price. It makes sense to stay at the party and enjoy the ride, keep on buying Bitcoin, keep on speculating, so long as you think you're really smart and can sell before all the other losers. Get out early and you'll make some money. I think that is all most people care about.

Phil - This is a really cynical view of cryptocurrency.

Jon - I might be cynical, but every time I have a conversation with one of these cryptocurrency enthusiasts, I always seem to get mysticism or politics. And economists like to see something real behind it. There is no real economic activity underpinning Bitcoin. And one thing that you often hear which I think is fairly dumb is a comparison with gold; you hear that Bitcoin's the new gold. Well, we know what gold is. I mean, our ancestors knew what gold is. You trust it because of 5,000 years of written history of using gold. Bitcoin is 12 years old. There is no comparison.

Eva - We can also touch gold. It actually exists in a tangible way.

Phil - Yeah.

Eva - Real mining.

Phil - This is why some economists and a lot of people prefer to call these 'cryptoassets' instead of cryptocurrencies.


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