Cryptocurrencies will not be able to replace actual currencies because of fundamental flaws, according to Paul Donovan, Chief Economist at UBS Global Wealth Management. Donovan added that the supply of cryptocurrencies cannot be reduced in case of a slump in demand.
According to a report published by Bloomberg, Donovan defined actual currencies as a stable store of value and said that fiat currencies provide certainty. He mentioned that people are not sure what they can buy with cryptocurrencies tomorrow and there is no structure of switching off crypto supply.
“A proper currency can be a stable store of value, providing certainty that it will be able to buy the same basket of goods tomorrow as it buys today. That confidence is derived from central banks’ ability to reduce supply when demand is falling. There is no such mechanism for switching off supply on most cryptocurrencies, and therefore their value can slide, leading to a collapse in spending power,” Donovan said in a video published by UBS.
Price Stability in Cryptocurrencies
Crypto assets have always been volatile in nature. Economists around the world have criticized cryptocurrencies for not presenting a stable store of value. Donovan added that it is difficult for people to use a currency that is not stable in value. “People are unlikely to want to use something as a currency if they’ve got absolutely no certainty about what they can buy with that tomorrow,” he added.
Crypto market volatility has increased significantly since the start of 2021. The overall market cap reached a high of $1.1 trillion during the first week of the year as the world’s leading cryptocurrency Bitcoin touched an all-time high of $41,500. Cryptocurrencies have seen a major correction in the recent days as the total market cap dropped by more than $200 billion and Bitcoin lost nearly $10,000 in price. BTC is currently trading around $31,500 after losing nearly 20% of its value in the last 7 days.