Cryptocurrency will never fulfill its promise to be a Currency

Article 5: The Paradox of Volatility

Introduction

Our “Paradox of Volatility” argument of crypto-faithful refers to its contradictory nature as a gambling instrument and a future widely-used currency. In this article, we will discuss how cryptocurrency can't achieve acceptance as a reliable medium of exchange while simultaneously serving the speculative interest of traders and investors, as the two are inconsistent.

Cryptocurrency as a Gambling Instrument

For gambling to be exciting, there must be large and frequent price fluctuations i.e., volatility. It caters to the basic human desire of an adrenaline rush and get-rich-quick impulse, and of course multiple tokens allowing gamblers to switch between different coins add to the fun. The price volatility of the cryptocurrency, widespread availability and low entry-barrier, makes them ideal for speculative gains (and losses) in a shorter period.?

However, for cryptocurrency to be viable as a real economic currency, its value must be stable and predictable so that it can function as a unit of account (standardized monetary unit of measure that provides a consistent way of quoting prices, conducting trade and maintaining books).

The Paradox

• Nullification as a unit of account function

Cryptocurrency is highly volatile and cannot serve as a unit of account because the value of Bitcoin requires constant updates to reflect the correct value accurately (against the general basket of goods and services consumed by the population). For example, if the price of a product is 1 BTC in the morning, and BTC’s value drops by 20% by noon, then the seller would need to change the price immediately to maintain the same value in fiat (or value) terms! It would confuse consumers and businesses as it complicates the planning, budgeting and transactions. This complete unpredictability of its price in the near future also makes it unviable for businesses to enter into long-term futures or contracts. For example, a contract to deliver a manufactured good in three months becomes highly risky if the cryptocurrency used for payment fluctuates significantly in value, as neither party can predict the actual worth of payment. Similarly, a maintenance contract for hardware over a period of two years would face uncertainty, as the value of cryptocurrency used could vary dramatically, complicates the budgeting and financial planning for both parties.

• Contradiction with single Numeror condition

The term “Numeror” refers to a standard unit of measure for value, typically fulfilled by a stable currency. However, cryptocurrency comprises literally thousands of digital coins like Bitcoin, Ethereum etc., each with different underlying algorithms, values and levels of volatility. This means that there is no single superior cryptocurrency to serve as a universal measure of value.

Self-contradictory nature of crypto-enthusiasm

Crypto enthusiasts promote cryptocurrency primarily through its use as a speculative instrument, attracting users. Their argument follows a chain. (as shown in below chart)

Crypto enthusiasts argue that cryptocurrency, being a fun gambling instrument, attracts more users, which in turn will jack up the prices of already existing coins. This price rise enhances their popularity and value as a gambling instrument, thereby restarting the self-fulfilling cycle. While this part of the argument is valid, the problem arises when extending this argument to suggest that the initial volatility-driven publicity, which fuels public interest and drives up prices, is compatible with the stability required to function as a true medium-of-exchange and unit of account, which is demonstrably false. If cryptocurrency is to become stable enough to be widely accepted as currency, then it would lose the volatility that makes it attractive as a speculative instrument, thereby breaking the self-fulfilling cycle of “rising popularity brings in new users and consequently increasing prices". Either way, there is no self-reinforcing cycle that starts with gambling and ends with currency, or vice-versa.

In the wild west days of 19th century America, many companies, particularly those in remote areas, issued their own private currency called scrip. This scrip could only be used within the company store, ensuring workers had access to basic necessities. However, scrip's limitations ultimately led to its downfall. It lacked acceptance outside the company town, limiting its usefulness, and its value was completely dependent on the company's stability. If the company went bankrupt, the scrip became worthless. Like scrip, some cryptocurrency aims to be a medium of exchange, but within a limited online community. Cryptocurrencies also lack a central authority to manage supply and inflation, leading to extreme price swings. This volatility discourages its use for everyday transactions. This highlights a key problem for private currencies – the inability to achieve widespread acceptance and stable value compared to government-backed currencies.

Therefore, our “Paradox of Volatility” argument proves that cryptocurrency cannot fulfill the dual roles of being both a speculative instrument and a stable currency. The initial condition of price volatility makes them attractive for gambling, but that directly contradicts the stated final objective of achieving stability and acceptance (as a currency used for widespread economic use), rendering the argument self-contradictory. But if not for gambling, how can cryptocurrency gain popularity with the masses? So far, the only innovations in this field has been on how to trade crypto, or make leveraged bets on its price-movements. If for the last 15 years of its existence that was its only appeal, can the crypto-enthusiasts suggest an alternative narrative that is consistent?