(Note: this article was updated on January 19, 2021 to account for new information, particularly the extension of the boom in Bitcoin valuation since the original publication on December 14, 2020. These changes reinforce the points made in the original)

Bitcoin has been on a roll lately, hitting a record high of $40,258.92 on January 3, 2021 (the previous version of this article thought it was a problem in early December at over $19,000).  An article in Bloomberg News, Bitcoin Jumps to Record High as Bulls Say This Time Is Different (paywall), gives a few reasons, among them the decision by both PayPal and Square Cash App to allow users of their digital wallets to trade cash for Bitcoin.  However, Bloomberg notes that the last time this happened, in 2017, Bitcoin lost over 70% of its value the following year. Both disclose that Bitcoin is a volatile asset, but are primarily viewed as payments utilities, not investment vehicles. Indeed, Bitcoin was down at one point by 25% on January 10, 2021, but recovered to “only” lose 10%.

Currency or Asset?

A key requirement for a transactional currency is that its value is stable.  In 2019, I decided to experiment with a Bitpay prepaid card, because it seemed to represent a way to use Bitcoin even at merchants who do not accept it natively (which are the vast majority).  Within three days, before I even had a chance to get a card, my $100 had shrunk to $74, and I aborted the experiment.  The website Coindesk charted the price for Bitcoin over the last year, as shown in Figure 1:

Figure 1. Bitcoin has shown extremely high volatility over the past year.
One Year Price History of Bitcoin

Source: Coindesk. Updated on January 19, 2021 to capture the extreme runup since this article was originally published on December 14, 2020.

It is easy to see that there are some vertiginous plunges in the value of Bitcoin to go along with the generally increasing trend, particularly on March 8, 2020 and just last week (January 10).

Looking back at the Payments 101 articles on credit cards, we can see that merchants were willing to sue, and central banks willing to cap, card fees of less than 3% of the purchase value.  What merchant would be willing to accept $100 in cryptocurrency, knowing that they might only receive $74 when the transaction was settled? For that matter, what consumer would be willing to buy something for $100 in Bitcoin, knowing that the same amount of Bitcoin might be worth $125 in a few days?

Bloomberg points out that “Bitcoin remains highly volatile.  It has posted an average daily move of 2.7% this year, according to data compiled by Bloomberg.  That compares with swings of 0.9% for the price of gold, which is sometimes contrasted with digital assets and also hit a record in 2020.”

Since the way that Bitcoin and other cryptocurrencies are generated is called “mining,” the link to gold was built in from the earliest days in 2008.  However, almost nobody uses gold as a payment method.  It is used, like Bitcoin, as an investment asset, and as a hedge against inflation or volatility in the equity markets.

Another concern is that 95% of all Bitcoin’s value is held by only 2% of accounts, representing early adopters, and suggesting that it is not accepted by enough consumers, businesses, and merchants to be a viable currency.  PayPal and Square may change all that, but I suspect most consumers will experience the same volatility I did, and conclude it is just too unpredictable for everyday use.

For this reason, I tend to think of Bitcoin as a speculative asset and investment, not as a currency. However, there are exceptions.

Use Cases for Bitcoin as a Currency

There are, in fact, currencies that are even more volatile than Bitcoin; take, for example, the hyperinflation in Venezuela in 2018, when the inflation rate exceeded 65,000%.  In that situation, even a volatile cryptocurrency like Bitcoin would be an attractive alternative.  In a country like the U.S., however, with stable banking institutions, highly efficient payment networks, and a well-regulated banking sector, the appeal of Bitcoin is much less.  If you have been puzzled by the hype around Bitcoin, your skepticism is well-founded.

The Case for Stablecoins

Bitcoin is not the only kind of cryptocurrency out there, however.  Since 2015, there has been a growing movement to create what are called “Stablecoins,” which do not have intrinsic value but are tokens for another asset, usually a national currency or a combination of national currencies.  These stablecoins have the same portability and flexibility of Bitcoin, but have little volatility, making them useful for payments.  You might have heard of Libra, the Facebook-sponsored stablecoin which had a botched rollout but is now being re-envisioned as an independent entity working together with national currency regulators to be a superior option for cross-border payments and digital payments.  On December 1, 2020, the Libra Association rebranded itself as the Diem project, in an attempt to distance itself from Facebook, which was seen as untrustworthy by regulators and legislators.  With a launch anticipated in January 2021, I expect Diem to give the stablecoin movement a big boost.

The Office of the Comptroller of the Currency (OCC) issued a ruling back in September that gave explicit authorization for banks to hold stablecoin reserves. The OCC is the primary banking regulator in the U.S.  See Federally Chartered Banks and Thrifts May Engage in Certain Stablecoin Activities | OCC (treas.gov)

This supports the idea that legacy banks are going to be central to the use of digital currency in the U.S. and other advanced economies.  Since even Bitcoin is routinely valued in fiat currency and must be exchanged into fiat currency before it can be used, banks are best equipped to do this.

Existing Stablecoins

One of the most popular stablecoins is Tether, which is commonly used as a “bridge” currency between Bitcoin and other public cryptocurrencies.  However, Tether has been subject to consistent doubts about whether it has enough reserves to warrant its stable value; its website still has only a report by a law firm from 2018 that openly admits “The above confirmation of bank and tether balances should not be construed as the results of an audit and were not conducted in accordance with Generally Accepted Auditing Standards.” As of this writing, Tether was the fourth largest cryptocurrency by volume at $19.7 billion (source: Coinbase).  Tether should probably be considered a “systemically important” cryptocurrency, and the fact that it is not required to produce real audits is a threat to the price of Bitcoin and the other major cryptocurrencies.  If Tether were to fail, liquidity would dry up, and we could see a major market crash. (Edit: since this article was published, there has been an important new analysis of Tether’s likely fraudulent activity, which suggests that unrestricted issuance of Tether has correlated strongly with the increase in Bitcoin values, raising the risk of a major crash in Bitcoin values.)

An alternative to Tether that is gaining traction is Circle’s USDCoin (USDC).  Unlike Tether, USDC is governed by a consortium called Centre, that “provides technology protocols and governance standards for the deployment of asset backed fiat-tokens on existing public blockchain infrastructure.”  USDC also has monthly transparency reports authored by a real accounting firm, Grant Thornton LLP.  It currently sits at 13th place in total assets ($3.1 billion).  A third stablecoin, Dai (DAI) sits at 24th place with $1.1 billion in assets.  As far as I can tell, Tether’s supremacy is based on its speed to market and the fact that (so far) there has been no run on its currency.  This may change as competitors are able to challenge Tether.

Ripple’s XRP is ranked third on the list, with $26 billion in assets, and is a bit of a misfit; privately managed, it is like a stablecoin in some respects and not others.  XRP is not backed by fiat currency, and trades freely; however, it is actively managed so as to maintain a relatively stable value and is embedded into a cross-border payment network called RippleNet, in which many banks participate.  One advantage of XRP is that its use is optional; if the transaction does not involve currency exchange, it can be bypassed.  In cases where currency conversion is required, XRP can act as a bridge currency, cutting out traditional foreign exchange brokers.  Since XRP is not held for very long, any fluctuation in value is outweighed by the cost savings and quicker settlement time.

The most prominent national digital currency is being issued by the People’s Bank of China in the form of a digital yuan.  On December 6, 2020, CNBC reported on the release of 20 million digital yuan ($3 million) through a lottery for residents in Suzhou.  Chinese e-commerce firm JD.com was the first to announce it will accept the digital yuan.  While there has been more study than action from other central banks, China’s launch will be highly influential on other central banks.  The Federal Reserve recently published a literature review outlining some of the issues they are considering.


When asked about Bitcoin and other public cryptocurrencies, I always try to steer people away from them.  They are far too risky for the average investor due to their volatility and bubble-like behavior.  Coindesk has an amusing (to me, at least) series of articles that attempt to use technical market analysis to predict whether Bitcoin will rise or fall.  To me, the focus on statistical metrics emphasizes the lack of economic fundamentals underlying the currency’s value.

PayPal’s decision to accept Bitcoin in its digital wallet is perplexing, for the reasons I outlined above: Bitcoin’s volatility makes it highly unsuitable for use as a currency.  Perhaps PayPal intends for people to hold Bitcoin as an investment, but that would be a substantial departure from its business model.  Rather than read too much into it, I urge you to learn more about Ripple and Circle, as well as central bank digital currencies.  That is where the future of payments lies.