Why cryptocurrency will never fulfil its stated purpose

Whilst the creators of cryptocurrency may have noble intentions, intentions of the original creator often have little say in how the general populace will use their inventions.

To understand why cryptocurrency will never be accepted into mainstream use as a currency, we need to quantify what makes a currency desirable or undesirable to use. Then we need to consider how cryptocurrency fails these metrics.

Generally speaking, a good currency above all else should be stable. To rigorously quantify the stability of a currency, we’d consider the variance in the exchange rate of a currency. In layman’s terms, over some period of time the lows and highs of a currency should not differ by much.

Why is stability desirable in a currency?

The stability of a currency plays a large part in how consumers use it. The cost of a good shouldn’t fluctuate day to day, I shouldn’t need to check what’s the market rate for a box of Oreos every week I visit the store. There should be relatively little friction (read: easy and no-nonsense) for the consumer to use the currency.

So let’s consider what happens when a currency is unstable, i.e. what happens if a currency undergoes periods of inflation and deflation?

High inflation results in consumers spending their currency as soon as possible because as time progresses they can purchase less and less goods. Inflation is defined to (generally) occur when more money chases the same amount of goods. High inflation results in a vicious feedback loop because as mentioned before, consumers try to rid themselves as quickly as possible of the currency in favour of goods–resulting in more money chasing the same amount of goods. See Germany post-WW2 for a historical example.

Inflation also has the additional effect of employers effectively paying their employees less, this is why in response employees should request an increase in wages proportional to the rate of inflation. It is often the case that employee wages may not respond immediately to inflation. Because of inflation, employers often have access to more money often resulting in the employer hiring more employees. This is one of many reasons why central banks elect to have slightly inflationary currency as employment rate is indirectly tied to inflation.

Well, what about deflation? Deflation is defined as the opposite of inflation. During periods of deflation, what happens over time is that the same amount of currency can purchase more goods. In effect, this reduces in less demand because if I can only purchase a single Oreo today but if I wait a day I can purchase two Oreos, there is incentive for me to not use my currency. Suppliers can’t stand to not have my money and they know I can’t stand to not have my Oreos! So what is the supplier to do to part me of my currency? They cut costs where they can, they attempt to shift the demand by lowering prices to entice me to purchase their delicious, delicious, Oreos. Like in the inflation example, this results in a self-feedback loop. See the Great Depression for a historical example of deflation.

Deflation has the inverse effect of inflation regarding employment rate. During periods of deflation, employers are effectively paying their employees more. Whilst this may seem desirable for employees, this often has the knock-on effect on if the employer is not able to secure more money (or at least maintain their income) this results in employees being laid off. What the employers should do in this scenario is to actually reduce the wages of the employees, but employees are (rightfully) highly opposed to that. So what employers instead decide to do is to lay-off employees rather than decreasing the wages of all employees. Again, this is why central banks elect to have slightly inflationary currencies as instead of the employer reducing the wages of the employees the central bank does it instead. In other words, inflation provides a buffer for employers for periods of slight economic downturn.

So what happens if we were to use a cryptocurrency as our main form of currency?

First, we need to define what a good representative of a cryptocurrency would be and then we should study the behaviour of the users of these currencies and the trajectory of these currencies. For our purposes, Bitcoin and Ethereum will be considered the model cryptocurrencies.

It is self-evident that neither of these currencies are anywhere near stable. The volatility and growth of cryptocurrency more closely resembles that of stocks… except magnified by a couple orders of magnitude. The users and proponents of cryptocurrency treat it as an investment vehicle rather than as an actual currency! This is fine by itself, but the proponents of cryptocurrency don’t advertise it as an alternative investment but as a replacement of traditional fiat currency!

As the number of Bitcoin and Ethereum is fixed, in the long-term they will experience deflation.

TL;DR.

Cryptocurrency is a bad currency because it lacks the stability found in orthodox fiat currencies. They will result in deflation which will lead to mass unemployment.