Volatility Makes Crypto More Expensive Than It Should Be
Cryptocurrency is well known for being an extremely volatile and unstable asset. One of Its biggest problems right now is that it can’t reliably be used as a currency. It’s much more useful as a speculative investment than a means of transacting.
The space is so new and so unregulated that the market is sensitive to many different market pressures and individual actors. However, more than just being an annoying problem, volatility stands in the way of cryptocurrency’s mission of empowering people with the ability to transact directly, without third party intermediaries.
Because we want to actually use crypto as a currency and not just a store of value like gold, the rollercoaster price changes hurt crypto more than, for example, Tesla’s unruly and unpredictable stock prices hurt the company.
Crypto Aims to Solve for Important Economic Issues (But Isn’t Quite There Yet)
Crypto is attractive as a currency for many reasons, the principal of these being the fact that we can transact peer-to-peer, at a large scale, with individuals whom we do not trust. Peer-to-peer means no middlemen. No banks or credit card companies between you and the person you’re transacting with. It’s like credit cards and cash had a baby that inherited the first’s convenience and the second’s independence from middlemen.
Cutting out the middleman makes transactions cheaper for everyone involved (except, of course, the middleman who ceases to make money). We don’t see it overtly when we transact, but every time we use a credit card, about 3% of the transaction goes to a credit card company. These corporations were clever enough to make businesses eat that cost instead of us, but that means that businesses have to build in the credit card fees to their prices that consumers pay in order to make a profit.
Nowadays, whether you use a credit card or not, you’re paying an extra 3% on pretty much every. single. transaction. That’s no big deal for your $10 lunch, but if you spend $50,000 per year on living expenses, credit card companies are pocketing almost $1,500 of that. It’s daytime robbery! All those credit card rewards don’t sound so cushy anymore, do they?
Crypto has the power to all but eliminate those fees. While we can’t completely eliminate transaction fees (someone has to pay the miners), we can reduce them to inconsequential amounts. Bitcoin transactions cost about $0.25 each. Ethereum’s are similar. That means that if you spend anything more than about $8, you pay less for transactions than you would with a credit card. Newer blockchains are being developed geared to perform even more efficiently and reduce fees to about a nickel (in full disclosure, the project I work on C∆, is working on just that). Considering the average credit card transaction is roughly $80 in the US, instead of paying 3% with credit cards, using crypto we could be paying between 0.05% to 0.3%. Back to our $50k example, you could be paying about $30 per year instead of $1,500. Sounds nice, huh?
Transitioning from credit cards to crypto
It does sound nice. And it is nice. The problem is that going from an economy full of credit cards to one full of crypto will be somewhat expensive. Before merchants will stop building credit card fees into their prices they must boast enough customers who use crypto. Until that happens, unless merchants adjust their prices for crypto payments, crypto users will pay credit card fees as well as the (admittedly tiny) transaction fees from the blockchain.
If that were all, this would be fine. But the volatility makes things worse, to the degree that it may be a serious inhibitor to mass adoption. I recently worked on a cryptocurrency pricing model that uses live market data to help merchants decide what exchange rate to use when they accept payments in crypto. Because of market volatility, in order for a merchant to sensibly accept crypto, they have to hedge their bets and charge more than the current exchange rate. Depending on how volatile the currency is, crypto users may end up paying substantially more than the 3% credit card fee transactions. Unless volatility calms down, crypto may never be a viable currency.
What does crypto need to survive?
My hope is that crypto will stabilize as more people view it as a currency and not as a speculative investment. However, I don’t think this will just happen on its own.
The most popular cryptocurrencies today are so wild and sensitive to market pressures that they will probably never fulfill the dream of truly being cheaper to use as actual currencies (unless major changes to the underlying economic structures are implemented).
We need more people to use stable coins. We also need to continue to innovate governance and incentive models on blockchains to calm market volatility. The better we get at this, the more likely we are to actually wean off fiat currencies and stop emptying our wallets into the credit card companies’ coffers.