Over the years I have written a number of articles on cryptocurrency as I am continually bothered by the way Wall Street uses difficult to understand speculative instruments to capture people’s investment dollars. Particularly disturbing to me is when I hear retail investors parroting the talking points of the brokers that sell them this junk.

I am probably too small to make a difference in the grand scheme of things, but as an analyst I feel it is my duty to correct misinformation. In my previous articles I explained how I believed Bitcoin (BTC-USD) would never generate a return on investment because it has no revenues and has no plan to produce revenues. I also detailed how investing in cryptocurrencies in no way provides the investor with ownership of the underlying blockchain technology. Thus, no matter how useful or valuable blockchain ends up being, it doesn’t give the crypto investment value.

In the comments of each of these articles one idea stood out as the primary criticism of my reports.

“you can’t analyze crypto like a stock. It is a currency, not an investment”

Now THAT is a dangerous idea and one I feel compelled to correct, hence the subject of this article.

Currency vs money vs cryptocurrency

Currency and money have subtle differences that depending on how one splits the hairs could make certain things not qualify as currency or money. Frankly, currency has undergone many changes throughout history, so even if crypto does not meet today’s definition of currency the definition could certainly be amended to fit it in. I am not here to argue semantics nor is it relevant to the viability of the investment decision to determine if crypto technically meets the definition of currency or the definition of money.

One could see that either way.

Instead, I want to discuss how crypto is categorically not currency or money in its function.

How a real currency is spent

Currency is a medium of exchange for goods or services. U.S. dollars are currency because you can go to any shop in the U.S. and buy whatever they are selling using your U.S. dollars. The products the shop sells are priced in U.S. dollars and there is no conversion needed. Dollars are exchanged directly for the product. This functionality is the same whether you are using physical U.S. dollars in the form of coins and dollar bills or digital money via a credit card, Apple Pay, PayPal or whatever other form of payment.

That is a true currency. It is fully liquid and spendable as itself without conversion.

How Bitcoin is spent

Crypto purveyors often reference how it is increasingly being accepted as a form of payment.

• There is a famous early transaction in which someone bought 2 pizzas with 10,000 Bitcoin.
• You can buy a Tesla (TSLA) with crypto.
• For a while you could even buy a bucket of KFC (YUM) chicken with crypto.

However, if we examine each of these transactions at greater detail, I think it will become clear that the currency used is actually the U.S. dollar, not the crypto.

In each example, the number of Bitcoin the good costs is referenced to the current U.S. dollar price of Bitcoin. The 2 pizzas cost 10,000 Bitcoin because at the time 10,000 Bitcoin was priced at $41 which is what the pizzas cost.

How many Bitcoin does a Tesla cost?

The answers is: however many Bitcoin equals the U.S. dollar price of the tesla.

The items are not actually priced in Bitcoin. They are priced in U.S. dollars and then Bitcoin is converted to U.S. dollars at a rate equal to its most recent trade.

This is no different than paying for an item with any other stock. Companies do this all the time. Adobe (ADBE) bought Figma using its stock. They issued the number of shares required to equal the $20B price tag.

Analysts described the event as Adobe using its stock as “currency” for the buyout.

Sure, we can use that term for Adobe’s transaction or any crypto transaction but I don’t think anyone actually thinks that Adobe is a currency.

By the same token, cryptocurrency is not currency. You cannot buy things with crypto. You can only buy things with their dollar equivalent value of said crypto with the seller knowing that they can immediately sell the crypto and convert it into dollars.

The fact that the use of Bitcoin to buy stuff requires referencing it back to its value (current price) in the actual currency (U.S. dollars in America or Euros in Europe) has 2 key implications:

1. It is not liquid with regard to transactions
2. Negative consequences on crypto prices if they get adopted more broadly

Liquidity as a key feature of currency

Cash is not a great investment. It will go down in value over time with inflation and inflation happens far more often than deflation.

The value of cash, however, is its supreme liquidity. If the stock market crashes or transactions freeze up you can still use cash to put food on the table or gas in your tank.

Currently very few vendors accept crypto, but for the sake of argument let us assume the future in which you can walk into a Kroger (KR) and use Bitcoin to buy your groceries.

What do you think happens to the ability to make such a transaction if the stock market freezes up?

If the vendor loses the ability to immediately convert that crypto back into dollars they will stop accepting it. The crypto loses its liquidity at the time when liquidity is most needed.

Grocery stores in the U.S. universally accept U.S. dollars and they continue to do so no matter what the stock market conditions are. It is that supreme liquidity that gives cash its value and why families are wise to keep emergency funds in dollars or whatever the primary currency of their country may be.

Negative consequences of crypto pricing if it ever becomes widely transacted

Let us imagine the future that crypto enthusiasts preach in which vendors broadly accept crypto as a means of buying their products.

You go to the store and buy goods with crypto. The vendor then collects their profits by selling that crypto and getting dollars, thereby keeping the same profit margin as if you were to buy it in dollars.

At an individual transaction level that works.

Now consider all the vendors selling the crypto to recover their dollars. That is quite a bit of selling pressure. The more broadly accepted crypto becomes for transactions, the more selling pressure there is on crypto prices.

Quite simply, it is not a sustainable model to transact in a “currency” that has to be referenced back to the real currency.

What about a future in which vendors price directly in Bitcoin rather than the dollar equivalent of Bitcoin?

In theory it would be possible for Bitcoin to become a real currency with a similar supreme liquidity of the U.S. dollar if vendors broadly accepted Bitcoin AND their items were priced directly in Bitcoin.

I don’t mean nominally priced in Bitcoin like the Model S that costs however many Bitcoin equals $140,000. I mean truly priced in Bitcoin.

This would be where a sandwich costs a certain number of Satoshi (the smallest fractional unit of a Bitcoin) and that same sandwich costs the same number of Satoshi 3 months later regardless of what happened to the price of Bitcoin in the interim.

I do not believe this future can exist.

As long as Bitcoin trades on the stock exchange its price movement would allow arbitrage of any product that is priced directly in Bitcoin.

If Bitcoin’s market price tanked you could use that to get a very cheap Model S and if Bitcoin’s price increased you could return your purchase and collect the upside.

That is why vendors cannot price directly in Bitcoin and why Bitcoin is not a currency. It is merely a speculative investment with no intrinsic value and no revenues. Caveat Emptor.