Can Crypto Replace The Dollar (Or Other Fiat Currencies)

In 2008, the world was shaken by a financial crisis that had never been seen before. After this crisis, a new asset class was born: Cryptocurrency. Cryptocurrencies have seen explosive growth in the past few years, reaching a market cap of over $1 trillion. This begs the question: could crypto ever replace traditional fiat currencies like the dollar?

Current generations of cryptocurrencies cannot replace the dollar. Most crypto tokens are too volatile and not universally accepted. Cryptocurrencies are durable as long as their network is online and secure. Until three functions of money are satisfied, cryptos cannot replace fiat currencies.

Read on to find out how they all fall short of the dollar’s glory.

Business woman offering bitcoin instead of cash.

The 3 Functions of Money

For cryptocurrencies to replace the fiat currencies, they would have to fulfill the three functions of money, which are:

  • Store of value: It should not lose its purchasing power. One hundred dollars today can be used to buy roughly the same amount as that 100 dollars could buy one year from now.
  • Unit of account: People need to be able to use money as a way to measure the value of goods and services.
  • Medium of exchange: People need to be able to use the money to purchase goods and services.

I agree that though these three primary functions are intuitive, they are challenging to fulfill. 

Gold, for example, is mainly used as universal storage of value, but it is not used as much in modern times for exchanging goods and services. Gold is also not very common for use as a unit of account.

Similarly, stocks are typically liquid and can be used as a means of exchange and storage of value, yet the unit of account is still a fiat currency such as the Euro or US dollar. It’s simple to come up with some assets that fulfill one or two of money’s functions—but rarely all three. The same is true for crypto. No coin fulfills all three functions of money perfectly.

Store of Value: Why Bitcoin is a Terrible Store of Value

Let’s look at the first function of money—the store of value. Money needs to be a good store of value to be used in the future to purchase goods and services. One hundred dollars today should retain the purchasing power to buy roughly the same amount as that 100 dollars could have purchased one year ago. People must be confident that their money will keep its value over time.

Unfortunately, crypto falls short in this department. The main problem with Bitcoin and similar cryptocurrencies is that they don’t have a counter value and are too volatile for now to be a good store of value. They are not stable yet.

The price of Bitcoin is incredibly volatile. In just three days, there was a 140% change. These large price swings make it very hard for people to use Bitcoin as a store of value because they never know if their money will be worth more or less in the near future.

For money per se, stability is crucial. If the value is unstable, prices must be adjusted regularly, which hampers economic activity. As a result, the volatility of crypto-asset prices makes them a poor store of value. This is one of the main reasons crypto cannot replace fiat currencies.

Sign on store door showing credit cards accepted, but no cryptocurrency listed.

Medium of Exchange: Why Cryptocurrencies Are Not Widely Accepted

The third function of money is that of a medium of exchange. A medium of exchange is needed so people can use the funds to purchase goods and services. But crypto falls short here as well. The main problem with crypto is that it is not widely accepted as a means of payment.

There are a couple of reasons for this:

  • Slow transaction processing speed
  • Environmental impact

Transactions per second

The main problem with crypto is that the transaction processing speed is very slow. For example, Visa processes around 1700 transactions per second, while Bitcoin can only process seven transactions per second. This means that if crypto were to replace fiat currencies, the transaction processing would have to be increased by more than 200 times. This makes it a huge challenge to handle high-volume transactions.

Environmental impact

Another problem with crypto is its environmental impact. The mining of crypto assets requires a lot of energy. For example, it is estimated that the Bitcoin network uses as much energy in a day as the entire country of Argentina. The mining process for most cryptocurrencies is not eco-friendly and results in a high carbon footprint. 

Elon Musk, the CEO of Tesla, has even said that they won’t be accepting any Bitcoin payments for their cars because of the environmental impact.

Though cryptocurrencies have a few advantages, they also have several significant limitations that need to be addressed before they can become a replacement for the dollar and other traditional currencies or even money itself

Financial Disclaimer: This content is for educational purposes only and is not suitable as financial advice. Opinions and statements expressed herein are those of the author. They do not reflect the views of Data Overhaulers or its owner. Data Overhaulers is not a subsidiary of or owned by any ICOs, blockchain startups, or companies that advertise on our platform. Investors should do their due diligence and meet with a licensed financial advisor before making any investments in any ICOs, blockchain startups, or cryptocurrencies. Please be advised that your investments are at your own risk, and any losses you may incur are your responsibility.

Mike Chu

Mike is a web developer and content writer living as a digital nomad. With more than 20 years of devops experience, he brings his "programmer with people skills" approach to help explain technology to the average user. Check out his full author bio by clicking here.