Cryptocurrencies May Reduce the Competition From US Dollar

Billionaire CEO Michael J. Saylor has called bitcoin an essential invention and recently said he owned nearly 18,000 bitcoins worth about $740 million.

But the founder of MicroStrategy, the Virginia-based business intelligence application software vendor, can’t use the cryptocurrency to pay for a $5 cappuccino at Starbucks.

Will Cong, the Rudd Family professor of management and associate professor of finance at the Johnson Graduate School of Management at Cornell University, told PYMNTS that some basic questions must be answered before cryptocurrency becomes as popular as the dollar.

At the close of 2021, there were about 30,000 bitcoin ATMs across the United States, nearly double the amount from the start of the year.

A Pew Research Center survey last fall revealed most Americans have heard about cryptocurrencies like Bitcoin or Ether, and 16% said they have invested in, traded or used one.

Still, most consumers are purchasing it as a speculative investment, not for its originally intended purpose, to pay for goods and services.

“What exactly are these cryptocurrencies,” Cong said in an interview with PYMNTS. “Are they hype? Are they really assets, or even commodities or monies? Are they the tulip of our time?”

Tulip refers to a 17th-century market bubble in which the price of the flower bulb swelled due to speculation by Dutch investors and resulted in a market crash.

When it comes to cryptocurrencies, Cong said there are thousands, and they should not be lumped together.

“They’re not all created equal,” he said.

When thinking about cryptocurrency, they have multiple uses, Cong said, including using them as money or units of payment.

“For Bitcoin, we know as a unit of account, it doesn’t quite work [due to] the high volatility,” he said.

The second category is platform tokens, a class which Cong described as very promising. He compared it to Amazon Web Services (AWS) the reliable, low-cost infrastructure platform in the cloud that powers more than 1 million enterprises, governments and startup businesses and organizations in 190 countries.

Another category, he said, is emergence of non-fungible tokens (NFTs), the non-interchangeable unit of data stored on a blockchain or a form of digital ledger.

“That’s essentially a category of token ownership tied to a particular product, such as a work of art or a particular service,” Cong said. “My mileage points from a United Airlines would be an example of this type of token. Sometimes, it’s not even blockchain based.”

A fourth category is cash-based security tokens, essentially tokenization of traditional security contracts, he added.

“Once we think about these categories, we can think more about what are the sources of value, what are the sources of volatility,” he said. “If you look at the entire cross section, we can build systematic risk factors just as we did for other asset classes.”

On whether cryptocurrencies will eventually challenge the dominance of the dollar, Cong said he and his team have been examining that issue. He said cryptocurrency challenges fiat currency while digital currencies will compete against each other.

“In a sense, [cryptocurrency] are taking away some transactions that used to be mediated all through the U.S. dollar,” he said. “They also challenge currencies that are not super dominant, for example, Canadian and Australian dollar. In addition to that direct challenge, the fact that they reduce the dominance of U.S. dollar is going to cause the competition from U.S. dollar on these other currencies to be reduced.”

The indirect effect on reducing competition from the U.S. dollar could potentially benefit these other currencies.

Despite all the confusion over cryptocurrency, Cong pointed out that El Salvador has adopted Bitcoin as its national currency.

Last fall, at the urging of El Salvador President Nayib Bukele, the smallest country in Central America adopted bitcoin as legal tender.

Samson Mow, chief strategy officer of Blockstream, the crypto asset firm overseeing El Salvador’s forthcoming, billion-dollar Bitcoin bond issuance, tweeted that the country is apparently preparing for a new Bitcoin law.

ElSalvador.com reported that Blockstream would work with the cryptocurrency exchange Bitfinex, sister company to stablecoin issuer Tether.

The news outlet noted that iFinex, the owner of the two companies, paid an $18.5 million fine last year to settle charges brought by New York’s attorney general. Those came after it was discovered that Tether secretly loaned Bitfinex hundreds of millions of dollars to keep it afloat after the exchange lost $850 million, allegedly to theft.