September 26, 2021 — El Salvador this month became the first country to adopt a cryptocurrency, Bitcoin, as legal tender. One says “the first” as if there will be others. But the idea is highly dubious.
I will admit, like many economists, that I fail to see what problem cryptocurrencies solve. They aren’t well designed to fulfill any of the classic functions of money — unit of account, store of value, or means of payment – in part because they are so extraordinarily volatile in price. This volatility is not surprising, since they are backed neither by reserves nor by the reputation of a well-established institution, such as a government or even a private bank or other trusted corporation.