Bitcoin the Global Reserve Currency, and our Multi-coined Future

So long as we are careful, we can learn from our past mistakes

So long as we are careful, we can learn from our past mistakes

Last time, I was detailing the reasons why Bitcoin requires a constitution, or a corpus of its own, in order to avoid any such existential debates about its vision in the future.  If we can avoid excessive hard forks, then we can surely safely lower the ‘jump to default’ risk of the Bitcoin network.  Any other type of risk would surely happen slowly and gradually, whether it be a slowing of adoption, or an increase in transactions.  This is not to say that we should be ignorant of those risks, but just that if we are all cognizant of them, we won’t be boiled like all of the other frogs in the kettle.

This is not a radical new view, many in the core dev group feel the same way, as you can see in Jeff Garzik’s prelude to his BIP100 proposal.  He clearly defined the dangers of both action and inaction within the context of block size limits.  He also quite succinctly commented on the lack of a clear definition of what Bitcoin is.  I agree with this opinion, and it drove me to appeal to the core devs on revisiting the dialog about creating a manifesto or a constitution for Bitcoin.  Having such a guide for all future protocol changes would only serve to make such discussions easier, for everyone can agree on what Bitcoin’s priorities should be.

In my draft constitution, I was deliberately vague, allowing much room for core devs and Bitcoin intelligentsia to flesh out the details.  This time I would like to go into more detail in what I see the future holds for Bitcoin, in the context of the crypto industry in general.

To start, we have to accept a premise, before we go on.  We must (at least for the purpose of this thought experiment into what may hold in the future) accept the idea that Bitcoin is so far the only crypto to have achieved a monetary status.  Relatively speaking, in terms of general acceptability, global penetration, invested capital, and mind share, no other virtual currency can compare to Bitcoin.  While I will not claim that this will always be true, it is sufficient to accept that it is true at present, and thus will bring us to recognize that Bitcoin’s main value proposition, or its ‘value’ at present, derives primarily from this characteristic, which no other cryptocurrency can boast.

If we accept this premise, then what I think we can do to build a strong crypto ecosystem, is to leverage Bitcoin for what it is good for, which is, as a base store of value.  It is already the most common way for people to buy other cryptocurrencies.  Most competing crypto currencies, such as Litecoin, Ether, Ripple, or Dogecoin are mostly bought with Bitcoins.  In effect, Bitcoin is acting as the ‘USD’ of cryptocurrencies already.  There already exists many exchanges, and gateways which will accept your fiat dollars/yen/euros/shekel and give you bitcoins for them.  The market is leveraging this network effect in order to provide access to other cryptos through bitcoins, and this in turn is creating large pools of capital to be stored on the Bitcoin network.

How can we take advantage of this effect?  Well, if you consider that you really only need ‘one’ main store of value, (like the role that gold played back in the days of gold backed paper currencies) then we can see that where other crypto currencies can make a market for themselves is in specific use cases or feature sets.  If we imagine an analogous world without banks needing to safeguard or be custodian to our money; i.e. where everyone kept all of their savings in private digital vaults, then Bitcoin would be the equivalent to your current bank account, where you put your wealth for safe keeping, and other cryptocurrencies would be the equivalent to your wallet or cash.  You normally don’t carry around your entire life savings in a bag of cash, instead you take out a couple hundred bills a week from an ATM, and you put the ‘spendable’ cash in your wallet.

The 'gold standard' for digital currencies

The ‘gold standard’ for digital currencies

In a future with Bitcoin as the ‘bank account’, buying some other special use cryptocurrency, say, ‘CashCoin’ would be analogous to going to an ATM.  These special purpose coins may have more of the properties that you would expect in a blockchain that values high txn/s and short confirmation times.  CashCoin would be pyramided on top of the store of value of Bitcoin the way fiat currencies are currency backed by USD.  And before that, the same way fiat money used to be backed by gold.

Astute readers who study economics may reject the notion that such a use-specific coin such as CashCoin would have the same ‘store of value’ as paper cash, and thus would fall short in competing with USD on that basis.  I would argue that a CashCoin can provably act as a better store of value than USD, so long as it does not allow for inflation, or allows for a very modest inflation, which is fixed.

So imagine a future, where many coins exist, many of which may be special purposed, to do smart contracts, or property registries, or used in a specific market, like a ‘StarbucksCoin’, which is used to buy caffeine and donuts at any of their chain stores worldwide.  They can also be geographically based local currencies which can be used within a small town and benefit the economy of that locality.   Having local currencies is not a new concept.  In fact, they have been shown to be quite successful as an economic tool for small communities in the past, you can see the present list of local currencies in use, here.

In such a reality, converting from your ‘savings’ in Bitcoin to a specific crypto currency (aka going to an ATM and withdrawing cash) is as easy as a few taps on your smart phone.  Mobile wallets will be able to hold and spend any crypto currency, and stores and retailers will be accepting any number of them.  Bitcoin would just be used mostly for large transfers between businesses, remittances across the globe, or perhaps for depositing into your equity broker, mutual fund account, or for buying a house.  Using Bitcoin to buy coffee would be rare, as the per txn fee may be more than that charged using StarbucksCoin, or CashCoin.  It would likely still be cheaper than that of a credit card** but cheaper options will be available, and they will be used.  This is because you are paying a premium for a guarantee of secure store of value when you use Bitcoin, and that guarantee is not needed for purchases on the scale of a cup of joe.

The value pyramid, now and the future

This is the potential future of Bitcoin and other crypto-currencies.

We need to have a market for ‘who gets to put their txn/s on the Bitcoin blockchain’ and we cannot have this free for everyone, forevermore.  Why? Because how will miners get paid after block rewards phase out to zero?  And if we can’t pay the miners, then we lose exactly the one thing that makes Bitcoin worth anything.  — Its use as a decentralized money,  nay, a reserve currency system.

Next time, I’ll explore in-depth the dynamics of bitcoin mining, txn fee dynamics, and their effect on decentralization and the Bitcoin economy.  If you liked this article please share it.

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** this is because credit card payment networks also incur a cost of insuring the transfer against chargebacks.  As Bitcoin is a non-reversible payment system, no such chargeback insurance cost is required.

One thought on “Bitcoin the Global Reserve Currency, and our Multi-coined Future

  1. I would even go further and question if and why a “reserve currency” is needed?
    We are used to it as we need a measure of value. But if you assume you have smart software and user interfaces which shows you always your preferred anchor currency, the decision of which currency is the dominant one will be delegated to every single user. In reality most people in certain cultural boundaries will probably use the same, but it can be a natural developing process and might differ from region to region.
    Also the notion of life savings might change if we have specialized currencies for different needs. There might be a coin for a health care system, one for renting houses, one for investments in stocks, one for education etc. So to diversify the storage of savings directly to the kind of money in which it will be used might help to reduce systemic risks and keep individual risk exposure low. If you have an equivalent of 10 000 USD in a house renting coin, you might accept a lower security from its blockchain as if you have all your savings in one “account”.
    The security of a blockchain will be correlated with its risk exposure, as it is today with altcoins. The risk of an attack of an altcoin correlates to its market capitalization (excluding non economically rational motivations).
    Essential for those multi-currency scenarios will be to have trust-less, automated exchanges and wallets supporting fluently all those coins.
    With atomic cross chains exchange the concept is already in place (explored that topic a bit at: https://bitsquare.io/blog/the-problem-with-crypto-governance-is-power/). Though the implementation is still missing. Nothing for the near future but worth to consider.

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