What’s keeping cryptocurrencies from mass adoption?
Speculators flocked to Bitcoin and many of the alt-coins in hopes of getting in early and making a big exit, but everyday users haven’t warmed to cryptocurrencies.
There are many reasons why, but one of the largest barriers to mainstream adoption is the price volatility of cryptocurrencies.
So the question is, why do the prices change so much in the first place? It comes down to supply and demand: Most cryptocurrencies have only a fixed total supply, and yet demand for the coins is uncertain and constantly fluctuating thanks to speculation.
Of course, it’s easy enough to talk about the problem — coming up with a solution is quite another matter.
Why is Stability So Important?
The need for stability is not unique to cryptocurrency. Any currency needs to be stable in order to be used as a trusted medium of exchange. The more that prices rise and fall, the more ordinary people will shy away from using the coins for everyday transactions.
Whether they hoard the coins in the hope that prices will rise sharply soon, or they avoid using them altogether for fear that they will lose all of their value, people are not yet accustomed to seeing cryptocurrency as real money.
Worse, the unpredictability of prices wreaks havoc on regular money services, like remittance, currency conversion, and the use of ATMs. In order to use cryptocurrencies, businesses have to hedge their risks by charging exorbitant fees.
Bitcoin ATMs can charge up to 15% just to convert to fiat currency. This totally defeats the original purpose of cryptocurrencies, which was to offer a cheaper and more flexible alternative to other payment methods. With no advantage over government-printed money, why would the average person use them?
Patience is a Virtue
Price volatility has plagued Bitcoin from nearly the beginning. With what we have learned over the better part of a decade, why have cryptocurrencies still not solved this problem of fluctuating prices?
Human nature gets in the way, as it tends to do. It is difficult to stabilize prices in a world where people would rather play the market and get instant gratification by re-selling their coins for as high a price as possible. Without careful planning from the very onset of a cryptocurrency’s existence, it’s hard to recover from the effects of speculation.
Phase 1: Building a Stable Ecosystem
When building a cryptocurrency from scratch, you first need a solid foundation. From this foundation, the currency can grow and self-correct as it develops.
The first piece of the puzzle is being able to reliably predict demand. Uncertainty around demand is the main cause of price fluctuation, as every user’s intentions are a mystery to every other user. Having a way to gauge real demand for a coin would go a long way in fixing this problem.
The issue with predicting demand, though, is the existence of speculators creating artificial demand. This is the core of the problem: With so much speculation, the price for the cryptocurrency will not reflect its actual usage and demand. It simply becomes a bubble that is constantly on the verge of bursting, and no one wants to risk their hard-earned money on that.
Traditionally, the solution to the problem of stability was to have a central bank. The government could then alter the money supply at will, for example by causing inflation. Cryptocurrencies are by definition decentralized — that is part of their advantage — and without a central bank they need an entirely new approach when it comes to squashing volatility. They need to do this without compromising the freedom of the users and without resorting to inflation.
Cooperation Over Competition: A Decentralized Community
“United we stand, divided we fall.”
What if there was a currency that encouraged people to cooperate? What if people were incentivized by a spirit of growth, rather than of greed? Under the ideal model, a network of cooperative businesses and services would coordinate with each other as a single unit. The coin would be shaped democratically by this co-op (shaped not controlled). Every user would have incentives to help the network grow as a whole, and the use of a blockchain would help make the process fair.
Instead of rampant online speculation, users would visit local exchanges to buy and sell the currency. The community as a whole would vote on when to increase the coin’s price, which would keep things democratic and guard against sharp spikes.