Stability determines who wins the crypto war

It would be difficult for anyone to imagine that a “currency” that often fluctuates 20-30% in value in a few days could gain widespread use as money. That is Bitcoin’s long-term problem.

The wild rise in the price of Bitcoin and other cryptocurrencies have certainly got investors – both private and professional – to sit up and take notice. In fact, in some sense we can say that to survive as an investment object for gamblers there is a need for price fluctuations. But the consequence of that is also wild fluctuations in the implicit purchasing power of the cryptocurrency, which certainly is not a warranted feature of any currency.

Bitcoin’s strength is its biggest problem

The reason anyone wants to buy a Bitcoin is that the amount of Bitcoin in existence, at least in principle, is fixed and cannot be changed. There is no central bank that can arbitrarily decide one day to double the amount of Bitcoin in circulation. That gives considerable credibility.

But this quantitative limitation is also Bitcoin’s biggest problem, as larger or smaller fluctuations in demand create huge variations in price. We have all been able to observe this kind of volatility recently.

While such price fluctuations may well make Bitcoin attractive to speculators, it also makes Bitcoin virtually worthless for everyday use as a common currency.

The solution: elastic money supply

It is possible that Bitcoin’s price volatility will decrease over time. But more likely, it suffers from the same ‘design error’ as the old gold standard, which also had a quasi-fixed money supply, giving rise to large fluctuations in the currency’s purchasing power.

This in my view makes it rather likely that Bitcoin, sooner or later, will be superseded by other cryptocurrencies, which will be designed to provide far more stability in their implicit purchasing power.

The way to ensure this stability is to think of a cryptocurrency where the amount of ‘coins’ is not fixed, but to a greater or lesser extent varies with demand. Thus, the money in circulation rises when demand does.