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When one walks into a grocery store or a shopping mall, the act of purchasing any good or availing any service is underpinned by its utility or functionality value. Textbooks on finance or economics have pages dedicated to the concept of utility. The explanation is simple – markets are shaped by demand and supply forces; demand is backed by consumption, and consumption emanates from utility.
However, sophisticated marketing techniques can trigger the demand (not consumption) for a good or service that may have no utility. Is this what the cryptocurrency realm is undergoing?
Utility & Cryptocurrency
Every economic activity has a utility. Airplanes weren’t built to inspire awe. They were built to reduce transportation time. When Steven Spielberg made Jurassic Park, it was meant to be consumed as entertainment. From fiat currencies to precious metals to investment instruments like stocks, everything has a utility. Fiat currencies are a store of value backed by central banks, while precious metals are used in production processes and in jewelry. Stocks infuse the much-needed capital to corporates, in the absence of which they have to borrow from banks or financial entities.
Cryptocurrencies, for the time being, lack utility value. Until some days ago, a digital currency could have been used to purchase a Tesla car, but this utility ended at the whim of the company’s multi-billionaire CEO. A utility that relies on such whims alone is no utility.
Different jurisdictions have different interpretations, or we can say utility value, of digital currencies. Japan recognizes these as legal property (not legal tender), European Union as qualified financial instruments, and the United States deems these as a commodity that IRS can tax.
There are two sides to the coin here. Developed on blockchain tech, which has utility and being adopted by banks and global entities, the cryptocurrency appears to be a revolutionary product. The other side of the coin shows crypto’s potential is limited to revolutionize how we undertake financial transactions. Central banks have already rejected cryptocurrencies as legal tender. In today’s regulated world, cryptos are outliers.
Maybe, cryptocurrency tech is yet to mature. Perhaps, it will metamorphose into something valuable sooner or later. But the deployment of vast resources in development and promotion of this yet-to-materialize concept is neither reasonable nor justifiable.
Consider this. The combined market cap of all cryptocurrencies is over US$ 2 trillion. The total market cap of all stocks listed on BSE, Asia's oldest stock exchange, is about US$2.9 trillion (as of May 18). The latter is situated in India, an emerging economy, where global investors are pumping money to gain better returns compared to developed economies. That trillions of dollars are parked in something, which is yet to prove its utility should definitely raise eyebrows!
© Kalkine Image 2021
Economies around the world are reeling from fiscal deficits. Debt-to-GDP ratios have breached permissible limits. Reason? Countries are providing stimulus in the wake of pandemic-induced slowdowns.
On the other side is the cryptocurrency realm where total market cap doubled in the first three months of 2021. And that’s not all. New exchange-traded funds (ETFs) have come up in the US and Canada, allowing crypto enthusiasts to invest in digital currencies without actually holding these in their wallets.
Resource allocation in the crypto world isn't limited to just capital. It also involves a huge deployment of human resource and electricity. Miners around the globe are using heavy computers to mine digital currencies. Mining is complex, and it consumes substantial electricity.
Resources that could deploy elsewhere are being recklessly parked in something that lacks utility. The world is running low on supplies, from semiconductor chips to wheat to critical medicines.
Cryptocurrencies, as proponents say, maybe the 'future'. But for now, their precedence over traditional activities (primary, manufacturing, and services) is untenable. Resource deployment needs a rethink.
