The development of cryptocurrencies has been fascinating to watch. In only five years, thousands of currencies emerged from the Internet following the release of the original Bitcoin protocol. Clearly, we are witnessing paradigm shifts in regards to commercial and legal frameworks, economic theory on money, and new avenues for self-expression.
One of the more interesting social consequences of cryptocurrency has been the drive to regionalize. Independent ethnicities, kingdoms, and linguistic traditions can develop a sense of identity by using specific currency. Coins like MazaCoin (in this case, used by the Lakota people) allow rallying around tribal or national pride. They can also serve political functions. Scotland, for example, has explicitly laid out a referendum in September 2014 for the people to vote on whether Scotland should become an independent country from Great Britain and thus the UK. The introduction of Scotcoin earlier this year will help form a public consciousness regarding separation; if the Scottish people can adopt Scotland cryptocurrency, this will reinforce the drive to decentralize further.
This reminds me of a point Andreas Antonopoulos made when he addressed the LA Bitcoin meetup in April – that money is a tool of expression. The users of Dogecoin demonstrate that they prefer conducting their transactions in Dogecoin instead of Bitcoin, despite remonstrations to the contrary. There is something silly, fantastic, and absurdist about Dogecoin. It is a coin floating on no perceivable “real substance,” and yet it commands market value. This is due to its community and social features: Dogecoin users are renowned to be generous in tipping and welcoming newcomers, they are silly and outrageous, they crowdfund races at Talledega, etc. Dogecoin also rides on its own absurdity – it is the highest form of satire. The users of Dogecoin make no pretensions about it being the best coin due to its inherently valuable technical features, etc. And yet this is precisely its strength. Visiting the Dogecoin and Bitcoin subreddits will grant one very different takes on the users of these coins. Bitcoin users, alas, are not as wild and zany as our Dogecoin counterparts. The act of using Dogecoin is a reflection of identifying with that currency. Because switching costs for cryptocurrencies is very low, merchants will begin accepting multiple cryptocurrencies. When I am faced with the option of purchasing goods by credit card, cash, bank card, or a handful of cryptocurrencies, one of the criterion for making that decision involves examining which community I want to support: international payment processors like Visa and Discover? Central banks and their commercial agents like Citi and Chase? Or do I want to transact in a currency that is widely held by people that share my values? So-called “non-economic” valuations begin to exist in the minds of crypto users that can manifest in using bizarre forms of payment, such as Dogecoin or even less popular coins.
This is not to suggest a global cryptocurrency is a phantom. While there will be a plethora of cryptocurrencies to choose from, certain coins will doubtless remained favored by investors and developers. This will be due to either their superior technological capabilities, greater liquidity, or idiosyncratic reasons such as one being the cryptocurrency of a large nation. The strongest of these factors is hands-down the liquidity effect. A more liquid currency implies there are more partners with which one could potentially trade. Money, in the Austrian perspective, is the most salable good in society. It is that good which commands the largest audience of prospective buyers, and therefore, if brought to market, would sell quickest and with the least amount of friction compared to any other good. Payment systems gravitate towards low-friction channels, and, other things equal, users will adopt the payment system that offers the path of least resistance.
Currently, this position is dominated by Bitcoin. By an enormous margin, Bitcoin’s market cap is superior to the market caps of other cryptocurrencies. This implies, in the eyes of investors and developers, that future cryptocurrency adoption will likely to continue to be Bitcoin-based. Bitcoin’s first mover advantages are self-reinforcing because it commands the liquidity lead on all other coins. Liquidity is also related to volatility. An illiquid currency experiencing large trading volume will react in a volatile fashion – prices will skyrocket and collapse over and over.
Bitcoin’s liquidity also implies a strong network, as large liquidity implies large transaction volumes, which implies a robust mining environment. Thus, the security of the Litecoin network is far lower than the security of the Bitcoin network, and this is due to miners preferring to validate transactions on a blockchain which includes many more hands. Other things equal, a more universal money is preferred to a less universal money. Not until Bitcoin, and cryptocurrency generally, becomes globally saturated will we begin to see the non-liquidity effects start to dominate.
Without any knowledge of technological superiority, new entrants into the cryptocurrency field will adopt the most popular and hence most liquid coin. Another, perhaps more common, function of money, beyond expression, is the facilitation of trade. Once cryptocurrencies are recognized by each individual around the globe as email currently is, then there is no additional network for Bitcoin (or any coin) to gain, and their respective liquidities will begin to approach equality. At a certain point, non-liquidity effects such as technological superiority or social factors can dominate, and probably will. The open source nature of Bitcoin makes long-term coin speculating impossible. Bitcoin could fall by the wayside as superior coins and crypto platforms gain prominence; it could also become the economic backbone integrating every transaction on every platform on the planet. Until such a time when the world is awash with cryptocurrencies, however, Bitcoin will continue to be the global leader.
How do these forces coexist? If people prefer more liquid monies to less liquid monies, then there is a tendency for a single money to emerge over all the others. Any slight advantage one money holds over another will create marginal adoption – which increases the liquidity of the money, and hence its attractiveness for other people – and thus create a self-reinforcing loop. This tendency operates so long as there is any competition between monies, for while the world is not integrated with a single money, we are still in a state of semi-barter. Only with a completely common unit of account will economic calculation – the process of transferring resources from less value-productive ends to more value-productive ends – be maximized. A world of competing monies is a world without a common unit of account, and hence economic calculation is stunted to the extent one cannot price his opportunity costs in a single unit.
What this implies is that while Bitcoin will grow and lead as a global unit of account, individuals may still prefer to exchange with coins that are less liquid. In particular communities, the members may prefer to be paid wages and purchase goods in a regional coin rather than in Bitcoin. This is particularly true given how easy it is to exchange any number of coins into Bitcoin and vice versa. The cost of retaining a less liquid currency shrinks if one can exchange it into Bitcoin at very little discount.
Thus, I imagine non-Bitcoin cryptocurrencies (altcoins) will act as highly liquid media of exchange for particular regions, companies, Internet groups, religious communities, and other voluntary collectives. This will become more popular as the levels of liquidity between all cryptocurrencies rise, and the cost of holding assets of lesser liquidity becomes very low. If some altcoins become as liquid as Treasury bills, for instance, then some people will prefer to use them as money for then their social signaling function dominates the liquidity function. Altcoins will be liquid enough to permit regional or private trading groups to flourish on them, and people will choose to give up the extra liquidity they could achieve with Bitcoin to embrace the personality of their unique coin. Fundamentally, this implies a harmony of interests between the users of all cryptocurrencies. Bitcoin will likely be the global monetary unit on account of its first-mover advantages and network effects, and altcoins will satisfy crowds looking for illiquid expression. They satisfy two different desires on the part of people who hold money, and there is no need for excluding one or the other.
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