Bitcoin: Not quite a currency

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CRYPTOCURRENCY INVESTING

Three Requirements of Money

Money has taken different forms through the ages, from cowry shells to peppercorns and from silver coins to the greenback, but they all share three common characteristics. They act as (1) a store of value, (2) a widely accepted medium of exchange and (3) a unit of account. Unfortunately, no cryptocurrency to date adequately fulfills these three essential functions.

7 vs 1,700

Bitcoin’s maximum transaction speed of 7 transactions per second (TPS) pales in comparison to conventional payment networks, which average 1,700 TPS.

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No cryptocurrency adequately fulfills the three essential functions of money.”

the price of bitcoin has remained volatile since inception

Bitcoin clearly falls short on this test of a workable currency. Stablecoins pegged to fiat currencies could function as a more reliable store of value, however they face a potentially existential risk: stablecoins would be made redundant once central bank-issued digital currencies become more commonplace.

Source: PGIM analysis; Refinitiv and Bloomberg. Note: Volatility of daily returns, annualized. The Bloomberg Commodity and MSCI Emerging Markets Index were used for Commodities and EM Equities respectively.

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OPPORTUNITIES IN the CRYPTO ECOSYSTEM

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Store of Value

Medium of Exchange

Unit of Account

SECURITY

Store of Value

Medium of Exchange

Unit of Account

SECURITY

Preserving value, at least over short periods of time, is an important function of currency. Fiat currencies can be eroded over time by price inflation. However, outside of extremely rare hyperinflationary environments, they have been an efficient store of short- and medium-term value. In contrast, the wild price gyrations of many cryptocurrencies make them highly unattractive as a store of value – even in the very short term.

While a growing number of companies accept bitcoin as a payment option, this situation is unlikely to expand to the same degree as fiat currencies. This is due to: Bitcoin’s maximum transaction speed of 7 transactions per second (TPS) pales in comparison to the speed of conventional payment networks, which average 1,700 TPS. Bitcoin’s fees have been as high as $50 for a single transaction, making it impractical for everyday, small-scale purchases.

Fiat currencies serve as a common yardstick to measure value across the range of daily economic transactions. Outside of the deep digital realm, however, cryptocurrencies are only rarely used to price products or services. Virtually no business fixes the price of their product in bitcoin and then converts it into fiat currencies.

Security refers to the rigor associated with verifying transactions on the blockchain. The degree of rigor determines the ability of the blockchain to function as expected while defending itself from fraud, cyberattacks, hackers, bugs and other malicious ware. Crypto exchanges have been hacked repeatedly, but the bitcoin blockchain itself has never been successfully compromissed.

Do Cryptocurrencies Meet the requirements of a currency?

Considering Bitcoin for an Institutional Portfolio

CRYPTOCURRENCY INVESTING

Rolling 3-Month Volatility

UNDERSTANDING THE CRYPTO CURRENCY ECOSYSTEM

Store of Value

Medium of Exchange

Unit of Account

SECURITY

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ENGLISH

GERMAN

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ITALIAN

Traditional Chinese

Download white paper

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Simplified Chinese

ITALIAN

Traditional Chinese

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GERMAN

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Simplified Chinese

ITALIAN

Traditional Chinese

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