Are cryptocurrencies “currencies”? – Cryptocurrencies

Joe Biden surrounds himself with a Bitcoin (BTC) pessimist

The debate often rages on among investors: are cryptocurrencies “currencies”? In the 21st century, many concepts find themselves upset by high mobility, strong globalization and strong technological development. This leads us to reconsider the monetary question to better understand the place of cryptocurrencies in monetary history.


Brief History of Currencies

No, the history of coins does not begin under Croesus. The first currencies were grains or silver, defined by a given weight, without being standardized. Likewise, gold first served as an art metal long before it had a political function. These first coins were highly dependent on the vagaries of production, which led to a very strong correlation between monetary and economic cycles.

With the millennia and the development of trade, gold and silver currencies (still not standardized) accepted by Mediterranean traders have spread. The standardization of these metals appears more clearly under Croesus (-596 / -546). This standardization is enjoying growing success because money therefore serves as a political weapon. It is the supreme economic power.

Quickly, the monetary degradation made his appearance. It is the process of increasing the amount of money in circulation by often adding metals of lesser value. Civilization after civilization, monetary degradation affects the territories like an epidemic. One of the most important ancient degradations was that of the Roman Empire shortly after its heyday (160-180 CE). As in many examples before and after the Roman Empire, the abusive monetary degradation causes the emergence of illegal currencies (“private“). These clandestine currencies ensured a minimum of confidence at the local level, which the state could no longer ensure.

Money is not based on anything

In the 11th century, as the European economy slowly recovered from nearly 8 centuries of decline, the need for trade involves the development of banks, and money. The first “banknotes” appear first in China, then in Europe.

After the development of mainly royal coins, the 19th century marked a considerable advance. From the middle of the 19th century, the fall in the value of gold and silver, and the growing need for larger quantities, allows the advent of the gold standard. Currencies are tied to a fixed amount of gold or silver. This leads right to a very strong monetary degradation after World War I with extremes like Weimar Hyperinflation. Drifts that can be found in the tens and tens since the first coins. The state therefore partially ensures monetary stability. There is bound to come a time when maintaining short-term stability requires monetary degradation, which exacerbates long-term instability.

After World War II, the gold standard indirectly made a comeback. But in 1971, quantities of gold could not be insured at a price of $ 35 an ounce, the gold standard was shattered: currencies all over the world were based on literally “nothing.” This is the floating system.

Chart showing the value of 9 currencies against gold since 1900.

A “currency” no longer needs a state to exist?

A currency no longer necessarily needs a state to exist, a currency (dollar, euro, etc.) does. A currency is first of all an economic institution, a currency is first of all a political institution. An economic institution does not necessarily need a state to exist, just agents able to accept this means of payment or savings. The only quality of a currency must be its ability to be framed by laws. The twenty-first century allows this law to exist without the presence of a state: this is the principle of Blockchain.

Making the value of a currency is trust that the agents grant him. This trust has historically been established by state decree. However, as we have seen, traders thousands of years ago used non-state forms of “currencies”. The state plays a secondary role in the success of a currency. Role still reduced in the twenty-first century.

The absence of a state for cryptocurrencies is actually the heart of the innovator. This is both a huge advantage (no national limitation, no centralized laws, etc …), but sometimes a drawback (difficulty building trust, etc …). Moreover, cryptocurrencies, just like state currencies, are based on nothing. This puts these two forms of currency in competition on the same basis.


The state of the 20th century is over?

The twenty-first century has changed more perspectives in monetary history than the past three centuries. First of all, the twenty-first century allows extreme mobility of individuals who can (almost) freely choose the state in which they wish to live. States naturally lose their sovereignty and compete with each other. This is a healthy process which obliges States to optimize their attractiveness and the well-being of their populations.

The fact that individuals are now able to freely choose their state implies a demand from individuals to freely choose their currency. In that the concept of state currency (currency), is outdated in the 21st century. Cryptocurrencies make it possible to respond to a global demand for the mobility of capital, individuals and goods. The result is additional mobility that would never have been allowed by states.

In addition, agents’ confidence in traditional currencies has fallen steadily for at least two decades. One of the main reasons is the excessive monetary degradation practiced by central banks in order to ensure the budgetary “survival” of the States. Money creation is one of the most powerful powers which comes at the expense of agents, which explains independence (theoretical) many central banks.

Graph showing the evolution of the BoJ and FED balance sheets. Source: FRED.

Between traditional currencies and underground currencies …

From a purely factual point of view, cryptocurrencies have not spread enough to recognize them as common currency, which also explains their high volatility. These are the main limits to considering cryptocurrencies as “money”. Bitcoin, for example, is only capitalized $ 300 billion, which is significantly lower than the amount of traditional currencies in circulation.

However, cryptocurrencies allow the advent of the free money market, which is a drift of globalization, increased mobility and technological development. Traditional currencies do not meet these specific characteristics of the 21st century. It is also a classic historical reaction to currency degradation, drawing a parallel with underground currencies.

Today, agents can almost freely choose the currency they wish to use, the state they wish to live in, the regulations in which they can best trade. Which is a deep break with the welfare state and the authoritarian state of the last centuries. Cryptocurrencies therefore appear as a liberal evolution.

A “new stage in the evolution of currency” (IMF, 2020)?

In other words, cryptocurrencies are a form of monetary evolution against traditional currencies. Their economic value is very real and increases as they become more democratic. Democratization which is progressing very strongly and should tend to accelerate (PayPal, Facebook, regulation, etc.). From 2018 to 2020, the number of crypto users grew from 35 to over 100 million. Or the equivalent of an entire country.

Beyond the democratization character, there is the degree of safety and speed that cryptocurrencies offer. Traditional currencies hardly allow this degree of security and speed. The search for speed and security has been a constant in monetary development.


Nevertheless, the search for strong monetary creation is an explanatory factor for human development. Access to credit and all forms of “easy money” have enabled increased development of human activities. By their limited nature, many cryptocurrencies would not respond to total economic use.

Ultimately, cryptocurrencies do not fall within the definition of a traditional government currency. Cryptocurrencies respond to a very specific demand for mobility, state competition, and the need for decentralization. What traditional currencies do not allow. Cryptocurrencies are therefore currencies in the sense that they allow payments and savings, with the only law of establishment, the blockchain. In other words, these are the characteristic currencies of the 21st century. A very particular form of currency that does not depend on any particular territory or any particular institution. However, their volatility, their still limited democratization, even their limited nature, are all factors limiting their monetary character.


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