Innovation is the outcome of a habit, not a random act.

Let me begin with a confession. Govcoin is a made-up name. Don’t for one second think there is a new cryptocurrency called Govcoin. And, before I start, let me make another one. I didn’t come up with that name myself but was beaten to it by The Economist which, in the second week of May, published a series of articles on the forthcoming wave of proper digital currencies which will most likely transform the world as we know it.

Proper – what do I mean by that? Is Bitcoin not a proper digital currency? No, I don’t think it is, although I will probably upset a few of my readers by saying that. Sponsors of Bitcoin claim it is a digital currency; however, for money to be proper, it must be issued by a central bank, and it must be far less volatile than the average cryptocurrency is today. As you can see in Exhibit 1, the volatility of Ethereum and Bitcoin, the two biggest cryptocurrencies by market capitalisation, is in a league of its own. The volatility of DXY, the USD index, is only a fraction of the volatility of most cryptocurrencies. How would you feel if you money were suddenly worth 20% less than it was yesterday? I know one or two people who would have a problem with that (me included), but that happens to Bitcoin almost every week.

Exhibit 1: Average daily volatility, annualised (%)
Source: Goldman Sachs Global Investment Research

Don’t get me wrong. Just because Bitcoin and other cryptocurrencies are not proper currencies, they are not necessarily bad investments, but currencies they aren’t. For those of you who subscribe to ARP+, you should read my recent paper on the phenomenon, if you haven’t done so already. I called it Cryptocurrency Mania, and you can find the paper here.

The digital race is on

Bank for International Settlements (BIS), which is the central bank of central banks, have recently conducted a survey on digital currencies. The objective was to take the ‘digital’ temperature on the world’s central banks, i.e. whether they are likely to launch their own digital currency any time soon and, if so, get a sense of how far down the road they are. You can find the survey here.