I purposely excluded cryptocurrency in my previous three posts about finances. Cryptocurrency currently is far too volatile to be used as an investment vehicle. It is highly speculative. I have been following it for many years now, and it is showing great promise.
Factors affecting cryptocurrency value
The great explosion in the value of Bitcoin over the holidays reminds us the unproven nature of cryptocurrency. I expected the value to drop once it hit $10k, and it astonished me that it reached $20k. There are many factors that affect the price of bitcoin. The two that are most notable are: continuous trading and the news.
Unlike the stock markets which open and close daily, cryptocurrency is continuously traded. This means that you could sleep through a dip or a peak in price. It also makes the currency be more nimble and reactive to external forces.
Similar to traditional stock exchanges, the news impacts the value of a cryptocurrency. Particularly, when a government outlaws or incorporates cryptocurrency. On one hand, the government just wants to collect taxes. On the other hand, the people want to have a stable non-manipulated investment vehicle. It will always be a power struggle.
Luckily, as the number of people and entities investing in cryptocurrency increases, the market fluctuations should subside. An economic upheaval in one country may minimally impact the currency. We are fast approaching a world where everyone is part of a single entity of commerce. Before, we had the borders of countries and continents separate us into silos, but now we’re much more of a unified economy.
Problems with cryptocurrency
There are a few problems with cryptocurrency. These problems are tough but solvable.
Bitcoin, in particular, can have high transaction fees. This is a common complaint, but it is only based on spikes in transaction volume. In order for a transaction to be processed, it must go on the next block, and there is a bidding war on whose transaction gets put on it. This in turn raises the transaction costs.
Another problem is that it has a lot of susceptibility to news triggering massive sell-offs internationally. As mentioned above, this problem exists in traditional stock exchanges, but the international nature of cryptocurrency can exacerbate the problem. The easy accessibility to the markets for those who are already on it allows for drastic corrections. Over time, I believe this will be mitigated by the majority of investors becoming knowledgeable about how the markets work.
Barrier to entry
Getting and using cryptocurrency has become easier, but it is not as easy as taking out your favorite credit card. We are getting there. I recently played with the Shift Card, which is a debit card tied to your Coinbase or other (supported) cryptocurrency account. So far, I have bought a beer with it and the transaction on the surface looked like any other kind. Behind the scenes, my Coinbase account exchanged some bitcoin to USD while the debit card company allowed the transaction to go through. Since the card is tied to your Coinbase account, they know how much money you have in it, so they can authorize the transaction as long as you have enough money on the account. The bitcoin transaction will eventually go through.
What is next?
Before cryptocurrency becomes a truly accepted method of payment, a couple things need to happen:
1) The mass market has to start adopting it.
Like all products, there are early adopters, main audience, and late adopters. Between early adopters and main audience, there is a gap. A book called “Crossing the Chasm” by Geoffrey Moore discusses this gap in detail. Being able to navigate this ‘chasm’ is what makes or fails companies and products alike.
2) There needs to be an easy integration to our current system of economy.
I see this already happening with financial industries creating exchange-traded cryptocurrencies, crypto debit cards, and big retailers like overstock.com accepting bitcoin as payment. It is becoming easier and easier to pay with cryptocurrency.
3) The cost of a loaf of bread in cryptocurrency will need to be relatively constant
We know we have made it to the next level in our society when a single government (or a small set of big companies) is no longer able to manipulate our financial industry. I do believe we will see some backlash at this, but in the end, it will have been worth it.
This is akin to treating cryptocurrency like gold. However, unlike gold, there is no physical item associated with this value, just a bunch of numbers. More importantly, a single government or entity does not control mining.
4) People’s income needs to come in a form of cryptocurrency
This is when everyone has adopted cryptocurrency, and people put trust in it. In particular, it becoming accepted as an exchange for goods or services without first converting cryptocurrency into a local currency.
I see a good future in cryptocurrency, and I believe we are past the tipping point where it can be easily eradicated. Mainstream adoption will disrupt the dominance of banks on the circulation of money and lending. It looks like rather than fighting, the banks are instead trying to leverage the blockchain technology.