Cryptos Won’t Work as Actual Currencies, UBS Economist Says

(Bloomberg) -- Cryptocurrencies may never be able to work as actual currencies, according to UBS Global Wealth Management.

The “fundamental flaw” inherent in cryptocurrencies is that supply can’t be reduced when demand is slumping in most cases, Paul Donovan, chief economist at UBS GWM, said in a video this week. That means they can’t be considered currencies, he said.

A “proper currency,” as Donovan termed it, 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.

“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,” Donovan said in the video.

Read More: UBS Wealth Warns Clients Crypto Prices Can Actually Go to Zero

Bitcoin futures are listed on the Chicago Mercantile Exchange alongside contracts for most major currencies, but the difference in daily trading volumes suggest that some investors haven’t yet embraced the crypto as a fully fledged currency. Amid the 11% price plunge for Bitcoin on Thursday transactions for the January futures were just above 13,000, while there were around six times as many for Japanese yen futures.