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The Defect in Bitcoin

Bitcoin has value. Gold, US Dollars, Nigeria Naira, LinkedIn account, smartphones, etc all have values. But having value is not enough to be a functioning currency: you must also be an effective means of payment. I studied finance up to doctorate degree and I know when a currency misses the point as a means of payment. Few years ago, I proposed to the African Union to allow prior convergence of regional economies before  a continental level currency (the paper is here on AU website). That will remove trade shocks and welfare loses. My point was anchored on the heterogeneous natures of African economies  which could create problems for any supranational central bank.

Simply,  owners of Bitcoin are holding it or hoarding it instead of using it as a means of payment. That is the reason why the price has become a domino. When the primary motivation on a currency is to "hold" instead of a means of payment, the equilibrium-value point shifts. Over time, the value becomes speculative. Why? There is scarcity, not out of demand velocity, but exogenous interests.

That happened in Nigeria last year. As the Naira lost its value, most people with US dollars held the dollars hoping that Naira will continue to fall. They had stopped treating the USD as a means of payment, but a hold system to gain on value. Naira-USD conversion became speculative. Then one day, the party ended.

I personally believe that as more people hold on to Bitcoin, instead of using it as a means of payment, Bitcoin will face severe changes on its credibility, for commerce. You do not want a currency that appreciates in double digits in weeks, to anchor your business contracts.

My job is to guide my clients in my Practice. Bitcoin has a defect. Until that is fixed, I do not see it as a currency, even though it has value.

The value is even speculative. Bitcoin is currently more or less viewed as a commodity such as gold, copper, etc. It cannot become a legitimate currency and keep rising the way it does. From what I have seen, it's not a question of if the bubble will burst, but WHEN!

Spot on Professor! I had this exact conversation with an expert in Blockchain field yesterday. Another thing is the decentralization of the system, I do not think it is possible to have a medium of payment in commerce without having a regulatory body (e.g CBN) to determine its presence based on the market forces (of demand and supply)

Good points. If Bitcoin wants to be a store of value like Gold, that is fine. But as you noted, it cannot be a currency without the demand velocity driving the value. That is where regulation may even help it

Well written, Prof.

Well spoken!