TL;DR Breakdown:
- A UBS economist opined that cryptos are not fit to make actual currencies.
- This is based on the supply rate, which can’t be reduced when demand drops.
Cryptocurrencies have been gaining attention in recent times due to recent surges in price. The confidence in this technology is raising narratives that they can actually serve as currency for trades, and a store of value, especially Bitcoin (BTC). However, an economist at UBS Global Wealth Management, Paul Donovan, thinks otherwise. Donovan blamed the fact that the supply of some of these cryptocurrencies can’t be controlled when the demand plummets.
This is the flaw with cryptos, says UBS economist
According to the UBS economist, the fact that the supply rate of cryptocurrencies like Bitcoin can’t be adjusted in accordance with a declining demand is a “fundamental flaw” that limits BTC and other cryptocurrencies from serving as “actual currencies.” For instance, about 900 new BTC enters into circulation every day, regardless of the demand. “That means they can’t be considered currencies,” the UBS economist added.
This is not the case for fiat currencies, which are controlled by the governments or the central banks. These authorities have the capacity to reduce the supply when demand for the currency is declining, Donovan said. “People are unlikely to want to use something as a currency if they’ve got absolutely no certainty about what they can buy with that tomorrow”, he added.
So, the lack of this mechanism for most cryptos doesn’t qualify them as actual currencies, as their purchasing is likely to collapse down the line.
Maybe, not for Bitcoin
While the opinion from the UBS economist could be a fact, this may not be a problem for Bitcoin, which has seen continuous growth in demand. Bitcoin has a supply cap of 21 million, out of which over 18 million are already in circulation. Institutions are flocking to the cryptocurrency, shooting up the demand for the cryptocurrency, which is also causing a scarcity for the BTC.
Companies like Grayscale are buying a large number of Bitcoin, more than miners can produce in a day. Also, It’s safe to say that the halving event was basically designed to address this issue, as the supply rate of the crypto would cut by halving every four years.
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