Cryptocurrency prices have been soaring and tanking and soaring again. Here is a chart of the Bitcoin/£ exchange rate:
The following thought experiment shows how a new currency with a fixed supply protocol may find it hard to break through and gain wide usage. One of the conditions for widespread use as a money is that it’s value is not too unstable.
You can imagine a period of relative stability, or at least predictable growth, when users think ‘this new currency could be the next medium of exchange’. Demand rises in anticipation. Given the existing cryptocurrency protocols, with supply unresponsive to demand, this implies a rise in the price. Users observe the price volatility and become sceptical about its future as a medium of exchange, since its price is volatile, and demand falls. The price of the currency falls again, confirming the sceptics’ view of its prospects as a widely used money. After a while in which only the hard-core optimists want to hold it, and with corresponding price stability, opinion turns again, and the cycle repeats itself.
Of course words like ‘volatile’, ‘rise’, ‘falls’ are relative to the alternatives. So this is a comment about how it may be hard to displace a currency which is managed so that the price absorbs fluctuations in demand.
A basket case currency, with even less desirable price dynamics, would be easier to displace.
