Crypto Is Fundamentally Flawed As A Currency, Says UBS Economist

News / 22.01.2021

With investors losing faith in fiat currencies and traditional payment systems, many argue that cryptocurrency, particularly bitcoin, is a viable replacement, and it has changed the concept of money. 

Some companies worldwide are already accepting crypto payments. Even PayPal has integrated cryptocurrencies like Bitcoin and Ethereum into its payment network and is set to allow customers to use them for purchases later this year, a move that could foster mass adoption. 

Crypto Not A Proper Currency

However, Paul Donovan, chief economist at UBS Global Wealth Management, one of the world’s largest wealth managers, thinks cryptocurrency cannot play the role of a “proper currency” due to the fundamental flaw in its supply and demand mechanism. 

As reported by Bloomberg, the economist said in a video that the flaw lies in the inability to reduce supply when there’s a fall in demand. As a result, cryptocurrencies are not fit to act as currencies. 

Donovan thinks that a “proper currency” should provide certainty as a stable store of value, maintaining its spending power over time. In other words, the currency should be able to buy the same basket of goods today and tomorrow. 

“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,” Donovan said.

According to him, this confidence can be derived from switching off supply when demand is dwindling – something central banks can do. There’s no way to reduce the supply level for most cryptocurrencies, which will, in turn, affect their value and spending power, he added. 

Crypto Could Go To Zero

UBS Wealth has always been skeptical of the real-world utility of cryptocurrencies. Earlier this month, strategists at the wealth management company warned newbie crypto investors that they could lose their money. 

The strategists believe that the crypto industry could face stricter regulation from governments worldwide, and nothing is stopping the biggest cryptocurrencies from going to zero in the long run. 

“There is little in our view to stop a cryptocurrency’s price from going to zero when a better-designed version is launched or if regulatory changes stifle sentiment,” they said. 

Mandy Williams joined the crypto space in 2016, and since then she has been learning and writing about cryptocurrencies and blockchain technology.