Being countable, storable and unmanipulable allows cryptocurrencies to function as money and economic assets. Cryptocurrencies are used for payments, though still rarely. They are traded speculatively, and they are also used as a store of value (a function that is thwarted by their being used for speculation). Apart from their more legitimate uses, cryptocurrencies also play a growing role in money laundering thanks to their anonymity and ease of transfer.
But can cryptocurrencies actually replace the dollar? Bitcoin is often discussed as a possible candidate for this, being by far the largest cryptocurrency in terms of market capitalization (measured in U.S. dollars, of course), daily transaction volume, share of mining activities, and other key metrics. Still, it is difficult to imagine that Bitcoin or some other existing cryptocurrency could replace the dollar, and not solely for quantitative reasons.
There exists currently no single relevant cryptocurrency that models the monetary profile of the U.S. dollar. On the contrary, it is often said that this is precisely the great advantage of cryptocurrencies compared to the fiat money issued by central banks: Unlike the U.S. dollar or the Euro, Bitcoin and other cryptocurrencies are decentralized and structurally immune to inflation. This is indeed the case, though not necessarily with all cryptocurrencies.
A non-inflationary nature and absence of central control might be a good thing for a currency, but it should not be overlooked that this is the precise opposite of the U.S. dollar’s characteristics. The dollar is monopolized and inflatable – which might be detrimental in the long run, but it certainly allows for central planning-style economic control. It seems hard to conceive that Leviathan would renounce this power of controlling its national economy and citizens‘ property, as well as global markets (which is why crypto enthusiasts see cryptocurrencies as a bulwark against totalitarianism). After all, this is one of the most vital and central powers of modern states (which is why abolishing central banks is a prominent idea of 21st century libertarianism).
On a supranational level, though, the outlook might change. Cryptocurrencies can realize different economic characteristics, e.g. some being issued and controlled centrally, others being decentralized; some being hard capped, others allowing for inflationary growth; some being anonymous, others being identified. For example, some cryptocurrencies are inherently scarce in supply and come with increasing mining costs, thereby mimicking the economics of precious metals like gold. Interesting economic effects and uses might arise from the theoretically infinite fractionality of a cryptocurrency.
With their different profiles cryptocurrencies might function for different purposes – some to store value, others for transnational payments, some to price and trade commodities globally, some to hedge, some to mediate foreign exchange, some to stabilize national economies, some purely for speculation, and, no doubt, some for criminal activities.
We can, therefore, imagine a global scenario of a plurality of cryptocurrencies with different profiles displacing the U.S. dollar in some of its current domains. This might mean a replacement of the current global dollar system through a freer and less centralized global system of diverse cryptocurrencies with different roles, though without the dollar disappearing completely. Such a vision points towards a multi-currency world where classic and digital currencies coexist, competing and complementing each other in a global financial system.
The systemic success of cryptocurrencies ultimately depends on whether market players move further into this domain. We see this already with private speculators and investors, exchanges, and even some countries. Regarding U.S. policy, Trump has made appreciative remarks about cryptocurrencies and just recently even issued his own crypto coins, $Trump and $Melania.
It should not be overlooked, though, that cryptocurrencies come with a certain caveat thanks to their technological basis. Their use depends on the availability of information technological infrastructure, servers, secure data transmission and other factors – risks that, on the other hand, citizens have already taken, often unknowingly, by relying heavily on electronic payment systems. While hard cash and gold can still be used for payments in scenarios where information technology breaks down, the same cannot be said for cryptocurrencies or digital money in general. At any rate, cryptocurrencies should offer great opportunities for investors willing to take a risk.
