The Unspoken Barrier to Cryptocurrency Adoption
In many circles of the finance world, cryptocurrencies have been discussed with reverence because of their “potential to disrupt.” Indeed, with the mortgage crisis still looming large over the economy, the lack of transparency in the current financial system has substantially lowered the sense of trust amongst ordinary citizens. Bitcoin and the field of other innovative cryptocurrencies attempt to address this problem head-on by applying a decentralized approach to controlling capital, taking the power out of a centralized financial institution. Given the entrenched technological infrastructure that exists today, the newfound transparency and respect for privacy from cryptocurrencies is definitely attractive, but the application of this progressive vision feels unattainable and out of reach presently.
One barrier to adopting cryptocurrency lies in how the space is discussed and measured. Officially, any coin that is not Bitcoin is referred to with the blanket term “altcoin” (Frankenfield, 2019). But, while Bitcoin exists as merely one application of blockchain, it also remains as only one crypto asset. Of course, it stands out as the most historically innovative coin, bringing to light the very philosophy of a decentralized financial system, with an established technological infrastructure that has seeded the market for cryptocurrency usage (Broström, 2019). But there are other coins that continue to innovate with original and dynamic applications that remain unjustly ignored.
There is no denying that instability comes with the crypto territory as it stands in 2019 (Yu, 2019), but as the wider population buys digital assets, the market will grow ever more stable (ibid). However, this does not automatically imply that Bitcoin itself is the crypto asset that will propel us into the future. Bitcoin should not be treated by the media at large like the US Dollar, the universal measuring stick for a currency’s relative value and health. There are many other coins that are working creatively beyond the template that Bitcoin has established, including stablecoins, which base their value in a fiat currency or commodity. These are new ideas that have the potential to push the crypto space forward by attaching tangible value to the historically volatile economy of cryptographic assets.
The USD Coin is one such innovation and, as you may have guessed, it bases its value on the US Dollar, with every USD Coin being the equivalent of $1 (Coinbase, 2019). Additionally, it is managed by not one, but a multitude of prolific cryptocurrency firms, like Circle and Coinbase, which maintains market decentralization while also capitalizing on the stability and inherent value in the US Dollar (Geron, 2019). These are all genuinely exciting attributes for the token, and USD Coin’s visionary creators designed this asset to incorporate the need for both a steady price and high liquidity. While built upon the creative philosophy of Bitcoin, it is important to note just how attractive these characteristics are when considering a substitute for the current financial system. What asset encompasses security and comfortable growth more than the US Dollar?
On the other hand, price volatility and relative uncertainty are at the center of Bitcoin’s narrative in 2019. Much of the conversation about Bitcoin itself involves speculation about where its price will “settle.” Mike Novogratz, an influential and well-recognized Bitcoin expert, recently predicted that the price could stabilize anywhere from $10,000 to $14,000, a staggering $4,000 range (Alexandre, 2019). While the transparency offered by Bitcoin remains attractive, the lack of precision in the stabilization of the coin are a cause for concern and stress, as anyone who purchased the asset in December of 2017 will tell you.
In spite of the somewhat steady intraday cycle for Bitcoin’s value (Eross, 2019), Bitcoin cannot stay consistent when it comes to pricing consistency as compared to other currencies. When looking at the Bitcoin Volatility Index, and comparing it to the USD/Euro Index, a stark contrast in predictability can easily be traced, which threatens the potential of Bitcoin as a feasible form of currency in the future. Predicting these movements is also difficult and inaccurate in and of itself. As Rainer Böhme and co. have pointed out, there is inherent market risk when owning Bitcoin due to this instability and relative uncertainty within the crypto space (Böhme, 2015). This is market risk foreign to the currency market as it currently stands and is borne thanks to Bitcoin’s lack of a defined governing institution, which causes its perceived value and the greater market’s attitude to sway considerably in comparison to traditional fiat currencies (Barker, 2019). Additionally, in the previously referenced Bitcoin Financial Bubbles: Digitalization and Modeling, Isakova Yu and co. concluded that various influential dependent variables cannot predict the price of Bitcoin accurately, with many random influences affecting the asset’s pricing (Yu, 2019). These swings and opaqueness in the market threaten the very idea of Bitcoin as a store of value or a medium of exchange, and as an asset, it could pose too much of a headache for consumers looking to dramatically shift their financial focus.
Elsewhere, the DAI Token has looked to improve the applicable functions of crypto assets in the wider economy. Maker DAO’s foray into cryptocurrency is incredibly exciting thanks to its potential to be used as collateral in making loans without the dreaded middle man (Geron, 2019). The Token is purely decentralized in the spirit of Bitcoin, while also conducting all transactions on smart contracts within the Ethereum blockchain ecosystem. As this invention grows, it will allow for the traditional, healthy flow of capital to take place within the economy whilst simultaneously eliminating the need for a central bank. The DAI Token is rightfully looking to expand beyond the microeconomic lens that typically characterizes cryptocurrency discussions. This story goes to show that there are other innovators working hard to expand digital assets to encapsulate all the economic needs of a traditional currency outside of Bitcoin’s purview. These assets make up an expansive field of Bitcoin competitors, one with pockets of incredible value and potential that are much more exciting than the headmaster.
When considering the current level of embedded infrastructure and cultural influence, does Bitcoin stand as one of the most crucial innovations of the 21st century? Of course, and as Bitcoin itself continues to innovate, it will be no less exciting to hear about the progress that it makes. But, do the massive problems with the founding coin indicate that Bitcoin, and Bitcoin alone, should encapsulate all that the cryptocurrency space has to offer? In my opinion, it would be best to continue to evaluate all comers when searching for the ideal asset that will provide enough security to unseat traditional currencies. Cryptocurrency is built upon newfound trust in the system, which is put in jeopardy by large swings in value. There is no way to bridge the “transactional trust gap” if the bridge sways in the changing winds of the market. It is promising but disheartening to think that coins that are essentially nameless to the wider population have the capability to rival the liquidity and usefulness of the market frontrunner. Once again, I am a big believer in cryptocurrency, and Bitcoin’s creators should be lauded for their creativity and foresight. The infrastructure and public attention brought about by Bitcoin’s growth have made this brighter economic future a possibility. However, the differences in market share between Bitcoin and its peers may simply be due to the “first-mover advantage” (Bonneau, 2015). Bitcoin should not be made the winner by default. Its troubles are not inherently seeded into cryptocurrencies – they are a mere offshoot of Bitcoin’s own identity. To steer national sentiment and digital potential, it is important to attract attention towards innovation and the exploration of new ideas more so than the daily value of Bitcoin. The newfound trust in the financial system that stems from decentralization will allow the developed and developing world to improve upon a broken infrastructure and move forward towards a better future.
Works Cited
Alexandre, Ana. “Mike Novogratz: Bitcoin Will Stabilize Between $10,000 and $14,000”. Coin Telegraph, June 27, 2019. https://cointelegraph.com/news/mike-novogratz-bitcoin-will-stabilize-between-10-000-and-14-000. Accessed 5 July 2019.
Barker, Jonathan Todd. “Why Bitcoin has a Volatile Value”.
Böhme, Rainer; Christin, Nicolas; Edelman, Benjamin; & Moore, Tyler. “Bitcoin: Economics, Technology and Governance”. Journal of Economic Perspectives, Volume 29, No. 2, 2015, pp. 213-238.
Bonneau, Joseph; Clark, Jeremy; Felten, Edward; Kroll, Joshua; Miller, Andrew; & Narayanan, Arvind. “SoK: Research Perspectives and Challenges for Bitcoin and Cryptocurrencies”. IEEE Symposium on Security and Privacy, 2015, pp. 104-121.
Broström, Anders; Ruiz, Felipe; & Saiedi, Ed. “Global Drivers of Cryptocurrency Infrastructure Adoption”. April 15, 2019, pp. 1-49.
Eross, Andrea; McGroarty, Frank; Urquhart, Andrew; & Wolfe, Simon. “The Intraday Dynamics of Bitcoin”. August 7, 2017, pp. 1-24.
Frankenfield, Jake. “Altcoin”. Investopedia, June 27, 2019. https://www.investopedia.com/terms/a/altcoin.asp. Accessed 7 June 2019.
Geron, Tomio. “Why Stablecoins Stand Out in the Cryptocurrency World”. The Wall Street Journal, June 10, 2019. https://www.wsj.com/articles/why-stablecoins-stand-out-in-the-cryptocurrency-world-11560218460. Accessed 6 July 2019.
L.I., Yuzvovich & Yu, Isakova. “Bitcoin Financial Bubbles: Digitalization and Modeling”. Advances in Economics, Business and Management Research, Volume 81, 2019, pp. 63-68.
SFOX, Medium, https://blog.sfox.com/bitcoin-liquidity-how-it-can-hurt-you-and-how-it-can-help-you-a989c7f9c925. Accessed 6 July 2019.
“The Bitcoin Volatility Index”. BuyBitcoinWorldwide.com, https://www.buybitcoinworldwide.com/volatility-index/. Accessed 5 July 2019.
“What is USD Coin?”. Coinbase, https://www.coinbase.com/usdc. Accessed 6 July 2019.
White, Todd. “Bitcoin Climbs to Highest This Year as Volatility Recedes”. Bloomberg, April 1, 2019. https://www.bloomberg.com/news/articles/2019-04-01/bitcoin-climbs-to-highest-level-this-year-as-volatility-recedes. Accessed 6 July 2019.
