What is currency? Just a synonym for money, and money has a clear definition within the CFA institute curriculum which is utilized around the world by some of the most highly respected members of the financial industry.
The purpose of money is to purchase goods and services, and to repay debts. There are a few key characteristics that a true currency must have. A currency must be a medium of exchange, a store of wealth and a universal unit of account. Let us take a dive into these a bit.
A medium of exchange should be: readily acceptable, have a known value, be easily divisible, have a high value relative to its weight, and be difficult to counterfeit.
A store of wealth means that the currency cannot perish over time, and should have a confidence built into its existence that it’s value will hold in the future. Counter to this aspect of the definition of currency would be the use of Tulips as currency back in the 1600’s.
A universal unit of account or “measure of value for all goods and services.” This characteristic of money is important because if the currency you hold and earn isn’t valid elsewhere in the world it is a highly debilitating.
Where does this leave cyber currencies like Bitcoin and Lite Coin?
Without diving into the details there are some seemingly clear obstructions to the definition of currency for these cyber “currencies.” First off, these cyber coins are not easy acceptable in the market at this time. It is difficult to spend these coins out in the real world. Secondly the value of these coins is far from known. This segment of the market is extremely volatile, if someone were to buy a cyber-coin today they would not have any true conviction in knowing whether its value tomorrow will be worth half as much or double. Third, it is difficult to say if cyber currency is difficult to counterfeit or not, it’s certainly difficult to understand how these coins are created and whether they are truly safe within individuals “coin wallets” or the like. Unlike bank accounts, these currencies are not FDIC insured and so if someone hacks your wallet and takes your coins, there is nothing the government can do for you. Lastly, these cyber currencies are not currently a universal unit of account. I can’t even walk into a Starbucks and use a bitcoin or lite coin to buy a latte at this time.
These self-proclaimed cyber currencies are not truly currencies. They seem to me to be a misguided hope that what you buy today will be bought by a bigger fool tomorrow. I would suggest staying away even as the impressive YTD gains seem attractive now.