Crypto’s Biggest Problem
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From my observations as a self-proclaimed crypto-fanatic, the cryptosphere’s primary focus is setting itself up to actually achieve widespread adoption. However, its limited supply is one of the core characteristics that may be hindering it from doing so.
For one simple reason, hard caps on the amount of currency that is provided. In some cases, coins have ‘burn’ methods that forever decrease the number of coins that will be produced.
When Satoshi originally created Bitcoin, this was a purposeful feature that he placed in the Bitcoin. He felt that the negligent handling of money and the “printing” of additional money to cover national debt and other needs was the primary cause of the spiraling inflation that had exacerbated the impact of the 2009 Great Recession.
In some ways, he was right. Government spending went through the roof in many different nations and so did the inflation rates. Specifically, the relatively new practice of ‘Quantitative Easing’ by the Federal Reserve in the United States has drawn the ire of many individuals as well. For those that are unfamiliar with the term ‘Quantitative Easing’, I have provided a definition for you below:
While this does reign supreme, in some respects, to merely ‘printing’ money to inject into the economy, the artificial purchase of goods/securities/bonds from the U.S. market could inevitably lead to the same result.
So, Satoshi was right in his assertion that inflation was a real issue that world economies were figuring out how to deal with. In some cases, governments have done such a poor job at managing their national currency that the currency itself has become essentially worthless in the international community, which subsequently cripples that nation’s economy.
With Bitcoin, Satoshi theorized, many of these issues could be usurped. From Satoshi’s perspective, Bitcoin was meant to be a form of monetary transfer that didn’t rely on the competence of one’s national government — thus, his obsession with the concept of ‘decentralization’.
However, what he didn’t account for is that monetary/fiscal policy, when implemented correctly, have a number of measures they may implement to reduce inflation as well. Bitcoin has no such measure. Since there was a finite number of coins to be created from the beginning (21 million), the world must satiate itself with only 21 million Bitcoins.
There were two consequences of this structure, however:
1. People are deterred from making purchases with Bitcoin
2. Because of #1, people will force themselves to evaluate Bitcoin in terms of its fiat value — creating the ironic unintended consequence of emphasizing the focus on fiat.
Many of us saw Bitcoin’s astronomic ascent from $6–7,000 all the way up to $20,000 late last year. There have been several other notable runs in the history of Bitcoin as well. This has led many to purchase Bitcoin as a speculative measure, only, rather than to truly adopt it as a currency.
The promise of becoming ‘rich’ has enticed many individuals to purchase the coin in hopes that they will be rewarded in more fiat cash for their investment and ‘holding’ of the currency.
With the knowledge of Bitcoin’s impending value at any given time in conjunction with its inherent volatility in price, there is a strong disincentive for anyone to actively spend Bitcon in the same way that they would fiat currency.
Because of consequence #1 (outlined above), the result is that the primary focus of and motive of obtaining and possessing Bitcoin is to acquire more fiat.
This is a fact that many in the field will deny, but it’s true. Look at the sentiment of the community when Bitcoin decreased by over 50% in price from its previous high of $20,000. There was panic. This panic ultimately revealed that most individuals didn’t feel secure in the idea that the value of Bitcoin transcended its value in fiat currency.
To simplify this, the going rate for Bitcoin in fiat dictates the value that people place on it and nothing else.
And why shouldn’t it? There’s no other practical way to quantify Bitcoin the way that we quantify cash.
For example, if you walk into a coffee shop and order a cup of coffee and the cashier tells you that the coffee would be $20, you’d balk at that offer, right? $20 for a cup of coffee is OUTRAGEOUS, right?
The only reason you can feel that the price is outrageous is because you’ve attached an inherent value to fiat currency (in this example USD). As a society, we’ve grown an intuitive sense of what constitutes a “lot of money” and what isn’t a lot of money. How did we come to this valuation?
In my opinion, there are two reasons:
1. Fairly static fiat prices for our favorite products (i.e., soda, groceries, clothes, gas, etc.)
2. Fiat paid for work completed is relative to the work being done (in most cases).
As a result, the value of a dollar is essentially pegged to the economy itself. The average person can’t wake up, snap their fingers, and make $1,000. There’s a degree of difficulty and qualifications needed to obtain it. There’s a certain amount of time that one must take, depending on their level of expertise and education, before they can even obtain this amount of money. This, in itself, gives it an inherent value.
Our intuitive sense of “Oh, I have $15,000, now I can get a car” or “Oh, I make $4,000 a month — I should be able to rent a solid apartment”, is what continues to give fiat its value.
Thus, even when the Federal Reserve in the United States continues to “print” more money or introduce Quantitative Easing, these inherent associations don’t really dissolve or even degrade by much in a relatively strong economy.
As a result, even when the value of the dollar changes fairly substantially in the foreign markets, products remain the same. For example, if the dollar fluctuates by 3%, prices don’t increase by 3% in the economy to make up for it.
In fact, the USD has been getting killed on foreign markets.
So, What’s the Solution?
The solution is for this technology to be used as a tool rather than to market itself as a standalone currency.
Do I think that it could be a safe haven in an economic crisis one day? Potentially.
Do I see people holding on to it long-term? Maybe, maybe not.
To Bitcoin’s credit, it has exposed one major issue — and that’s that there are currently no ways to spend money to another audience without needing to get permission from a bank.
For example, if you try to withdraw $20,000 for instance, you’ll most likely have to jump through a few hoops (in the United States at least).
· First of all, no ATM will ever allow you to withdraw that amount of money at once.
· You’d have to visit a bank branch.
· Bank branches in the USA are typically only available from Monday to Friday during the hours of 9 a.m. to 5 p.m., so if this need fell outside of those hours, you’re screwed.
· More than likely, if you went to the bank and asked them to withdraw such a large amount of money, they may hesitate to grant it to you without some sort of questioning.
· They may even block the request altogether.
· The IRS may choose to audit your account at any point and can even freeze your funds if they have any suspicion that the money is illegitimate.
· You will more than likely have to pay taxes + fees if you choose to transfer that money to another individual through your bank directly.
· Even simple transfers take 3–5 business days to go through.
· Every issue I listed above will be compounded if one wishes to send money overseas.
Bitcoin and other cryptocurrencies present the unique, unprecedented opportunity to entirely usurp all of the above-listed disadvantages. For that reason alone, there is an inherent value to possessing something like Bitcoin or any other means of transfer.
However, here’s the current issue:
It is Hard to Get Your Hands On Bitcoin or Any Other Crypto/Token
If you’re someone who has never owned Bitcoin or any other cryptocurrency in your life and you don’t have someone that you know and trust that already has some of this coin to transfer to you — its relatively difficult/tedious to get your hands on any worthwhile sum of the crypto.
Here are the reasons why:
· Platforms like Coinbase that allow individuals to exchange USD for crypto are in short order, at best. For most individuals, Coinbase is the only somewhat convenient way of obtaining crypto via straight cash in an accessible manner (i.e., not wiring thousands of dollars overseas and praying that you get what you paid for after the money is received)
Note: I’m speaking from the perspective of an American citizen — I know the process is different for European citizens.
· KYC/AML laws mean that exchanges like Coinbase still may not be usable by newcomers for a period of days/weeks or even months after initial registration because they must first be validated by Coinbase.
· Bitcoin ATMs charge exorbitant fees — sometimes in excess of up to 5%+ what the actual price of the currency is going for — and that doesn’t include network fees either.
· Other methods include simply purchasing it from another human being, which has been proven to be less than safe or reliable in the past and inevitably requires a solid level of ‘trust’ in a process that was meant to be trustless.
· Credit Card companies and banks that have summarily refused to allow customers to make payments for cryptocurrency have decreased the number of on-ramps into the crypto space even further.
· Attempts have been made to allow people to gain entry through fiat currency such as Tether, but those plans have been derailed, then subsequently mired in controversy (Google it — not going into it in this article).
Thus, Bitcoin and other cryptos are in a precarious position.
Given their permanently deflationary structure (limited amount of coins that will ever be made), cryptocurrencies, in theory, will always become more valuable over time as the coins become scarcer. As a result, individuals are strongly incentivized to hold the coin and not spend it, because spending it would mean foregoing an opportunity to benefit from its potential increase in price.
Since individuals don’t want to spend the coin, its value is measured solely in fiat and fiat alone (there are currency pairs, yes — but ultimately, everything is measured against fiat). Since cryptocurrencies are measured by their fiat value and fiat alone, the goal of crypto shifts from being an opportunity to use another form of payment to simply being a vehicle to acquire more fiat that people will actually use to spend on what they want.
The Issues I Stated Above Don’t Have to Actually Prevent it From Having Great Utility
As mentioned earlier, the value in Bitcoin being a vehicle to transport fiat currency is where it would truly be worth its weight in gold (no pun intended).
If there were some way for Bitcoin to be liquidated and transferred with little to no hindrance, then it, and other, cryptocurrencies would revolutionize the way that we make payments on planet earth.
Why Must the Liquidation Be Instant?
The acquisition and liquidation of Bitcoin and other cryptocurrencies must be instant because the only alternative would be to hoard some Bitcoin/cryptocurrency for use one day and given its rapid increases & decreases in price, this wouldn’t be a favorable setup for those that aren’t interested in speculating on its value at all.
However, if one could take $20 — acquire a cryptocurrency relatively immediately — then send that crypto over someone then that would be worth its weight in gold.
Are We Close to a Solution?
In many ways, I believe that Coinbase came dangerously close to creating a potential solution and they may not even realize it.
For those that are unfamiliar with Coinbase, they have a feature where one can simply hold money on the platform itself. Since the value of fiat currency, in a microeconomic level, takes a very long time to appreciate/depreciate — people do not fear holding or ‘saving’ fiat cash.
Banks are a perfect example of this concept. Despite the fact that the U.S. dollar depreciated by 10% this year, there are no shortage of Americans that are completely comfortable with putting their money in the bank and leaving it there until they need it.
Thus, by creating ‘USD Wallets’, where one can simply store pure USD in the wallet and use that to purchase crypto immediately, Coinbase has created a great potential solution to the issue of liquidity in the crypto markets. The fact that one can transfer their crypto to GDAX almost immediately serves as a testament to this as well.
As we’ve seen over the past few months, Coinbase is far from perfect. Between their ongoing war with Visa, KYC/AML user verification delays, random downtimes for sends/receives of the cryptocurrencies hosted on their site and capped withdrawal limits, they have shown that they do not yet have the capacity to come anywhere near facilitating the liquidation of crypto on a larger scale with any level of efficiency.
I know I said the conclusion is above, but I need to wrap up this write-up.
But Here’s My Final Opinion:
· The crypto space must focus more on adoptability and when I say that — I mean adoptability for the common man. I see too many projects that seem to be in an arms’ race with one another to see who can innovate the greatest tech. None of that shit matters if it becomes prohibitively difficult for people to get their hands on crypto.
· More on-ramps must be created. Promises like the ones made with the ‘LitePay’ app are a great step in the right direction. However, since they’re currently in beta, it remains to be seen whether this will be an efficient way of truly conquering crypto’s biggest problem.