The vicious circle impeding the entry of a new currency

Cryptocurrency prices have been soaring and tanking and soaring again.  Here is a chart of the Bitcoin/£ exchange rate:Screen Shot 2017-10-07 at 11.40.26

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.

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2 Responses to The vicious circle impeding the entry of a new currency

  1. Bancor says:

    Hi Larry,

    Great post! Thanks for bringing this important subject up for discussion.

    It’s very hard for new currencies to gain wide enough usage to be liquid outside of the local economy, and this illiquidity makes it hard for them to gain usefulness even internally. It’s a chicken and egg game we call the “Liquidity Barrier” which prevents all but the largest tokens from being listed in exchanges or achieving the kind of trade volume needed to be practically liquid there. In addition, the tokens suffer from high volatility (another result of low liquidity) making them even less useful to local community members.

    We wanted to share Bancor Protocol with you as we’re working tirelessly to address this very issue and allow small, custom and group currencies to thrive in the emerging economy. Banco enables new tokens to achieve liquidity from day 1 but connecting them all to a network (the Bancor Decentralized Liquidity Network) through the use of a “connector” token, BNT. Bancor uses an open source formula to algorithmically price tokens in the network vis-a-vis BNT and each other, allowing anyone to convert any token to another in the network at anytime at a transparent and predictable rate.

    We call these “Smart Tokens” because their market maker is built-in and not-for-profit. We think this solution will enable the long-tail of user-generated currencies to thrive, and we’d love to get your thoughts. Bernard Lieataer, Bancor’s Foundation President, has extensive experience with local currencies and their monetary policies, you can see him discuss the Bancor protocol here:

    Check out our website to dig into our whitepaper at http://www.bancor.network
    and please let us know if you’d like to develop these concepts any further. Best and thanks!

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