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Early on the 10th Beijing time Reuters said that according to two economists at the Federal Reserve Bank of New York, so far bitcoin and other digital currencies are far from being a strong competitors to means of payment such as cash, checks or credit cards.
Michael Lee and Antoine Martin, economists at the Federal Reserve Bank of New York, said in a blog post published Friday that virtual currencies typically thrive when traditional payment methods are in doubt. For example, in 2015 when Greece was struggling with debt, currency rates and bitcoin prices jumped at the same time out of concerns about capital controls and doubts about a possible exit from the eurozone.
Cryptocurrencies could solve the problem of making payments in a trustless environment, but that’s clearly not a problem that needs to be solved, at least in the U.S. and other developed economies. “If we lived in an anti-utopian world without trust, Bitcoin could dominate existing payment methods, but in today’s world, people tend to trust financial institutions to process payments and central banks to maintain the value of money,” Martin said.
In fact, bitcoin, ethereum and other digital currencies, while they have all grown in use and popularity, have significant drawbacks. For bitcoin, extreme volatility tends to undermine its ability to store value. This is different from traditional currencies managed by central banks, Lee and Martin said.
Bitcoin transactions consume a lot of electricity, with bitcoin transactions currently consuming an estimated 48 terawatt hours of electricity per year, a figure equivalent to the combined consumption of 4.4 million U.S. households, and it takes time to verify transactions. The convenience offered by cash and other traditional payment methods relative to cryptocurrencies is a huge advantage.
Drastic price fluctuations are a major drawback of virtual currencies. At one point Friday, the price of bitcoin hovered near $8,400, a price that is down about 70 percent from its all-time high of $20,000 in mid-December last year, according to the Luxembourg-based Bitstamp exchange.
“In a world where everything is priced in bitcoin, inflation and economic activity can fluctuate dramatically,” Lee and Martin said.