Investors Are Limiting the Growth of Cryptocurrency. Here’s Why.
Several years ago, Bitcoin was a relatively unknown phenomenon and only people ahead of the tech curve were mining and exchanging it on a regular basis. By 2017, that all changed, and Bitcoin skyrocketed from around $900 to over $20,000. Optimists in the crowd might have guessed that within a few years, its trajectory would continue to grow unabated, and we’d all be using Bitcoin (or some kind of cryptocurrency) for everything from paying our bills to buying groceries.
Consumers began clamoring to get a piece of the Bitcoin profit machine. Overnight millionaires populated headlines (and are still generating attention today), and hesitant investors on the sidelines began debating whether they should jump in at $20,000 or wait for a drop. That drop eventually came, of course, as Bitcoin now hovers around $8,000.
Sensationalist news stories the world over had unintentionally introduced Bitcoin not as a form of currency, but as a get rich quick scheme. And the ripple effect from this introduction is still hurting Bitcoin and other cryptocurrencies’ growth.
The Problem With Investing
What’s wrong with investing? Let’s start by reiterating the real purpose of cryptocurrency: it’s a currency, designed to be used to buy and sell goods and services. A currency is only valuable if it’s both believed to be inherently valuable by the population using it and used on a regular basis.
When people treat Bitcoin and other cryptocurrencies as an investment opportunity, rather than a currency, they’re inclined to either use a “buy and hold” strategy, purchasing a finite amount of Bitcoin and waiting for it to grow in value, or a market timing strategy, buying and selling Bitcoin with other investors, keeping the supply flow relatively limited. Every person using Bitcoin this way will, necessarily, remove some amount of Bitcoin from circulating where it should — in the open marketplace. Crypto being used to buy and sell consumer products, or to pay bills, will increase the public’s faith in cryptocurrency, and introduce it to new people who may not be ready to use it yet. Keeping it in your wallet robs it of that potential power.
There are also secondary ripple effects to keep in mind here. When investors contribute a level of activity to an asset that exceeds its volume-based tolerance, the price of the asset tends to get volatile, and fast. Lots of investors excited about buying the asset will drive prices far higher than they should naturally go, especially in uncharted territory (like cryptocurrency). In some cases, this creates a snowball effect; skyrocketing prices incentivizes even more investors to get involved, since they see it as a massive opportunity for profit., and they push prices even higher. Sound familiar? It’s what happened to Bitcoin at the end of 2017, and is the same activity responsible for developing economic bubbles. Sooner or later, that bubble bursts, and all the artificially inflated value of the asset is lost within a relatively short period of time. This is problematic for several reasons, including the fact that it prevents crypto from finding a steady, reliable price. It also presents an image of volatility and unreliability to the general public — who need to believe in the dependability of the currency if they’re ever going to be expected to use it.
Things are made even more complicated by the news media, which jumped on Bitcoin as an exciting opportunity to talk about a sensational up-and-coming technology. While some outlets delved deep into the blockchain roots of cryptocurrency with a realistic perspective on how it could be used in the future, most only reported on it as an investment opportunity. This framing created a feedback loop; more investors got involved, pushing the price artificially higher, which led to more “overnight millionaires,” which in turn led to even more sensationalist media reporting.
What Will Really Help Crypto Catch On?
It’s arguable that investors have some marginal positive impact on crypto growth, since they do bring attention to the blockchain, but there are far more events and strategies that would have a much more positive impact:
- Spending and appropriate media coverage. Instead of buying and holding cryptocurrency, more people need to be spending it. They need to stop merely believing that crypto will be valuable someday, and prove it by using it in their daily lives. Similarly, the news media needs to stop treating cryptocurrency like it’s an investment and start treating it for what it is: a technologically-driven currency that’s as good as any real-world fiat currency.
- Business adoption. You can only spend cryptocurrency if you have someplace willing to accept it. Businesses and organizations beginning to accept crypto as a form of payment would go a long way in driving adoption; not only would it give “investors” a place to spend their holdings, it would also popularize the idea of using it.
- Regulatory acceptance. So far, 130 countries have issued some formal recognition or regulation of cryptocurrency. The more countries that formally recognize and/or adopt cryptocurrency, the more legitimacy it’s going to hold. Unfortunately, there’s little way to control this factor; it may be a matter of time.
- Consolidation. There are currently something like 1,600 cryptocurrencies in circulation, so even the most enthusiastic blockchain fans can’t keep up. Together, they have a market cap of $100 billion, which is more formidable than the economies of 127 countries. Clearly, they’re a force to be reckoned with already — but individually, only a few notable currencies are leading the pack. Having one or two clearly dominant options would drive further consumer confidence, and therefore adoption.
If cryptocurrency is going to serve its true purpose — functioning as a secure, nationally agnostic form of fiat currency — we need to lose the mentality that it’s a smart investment (or a dumb investment). We need fewer people checking the price of Bitcoin daily and more people spending Bitcoin daily. We need businesses accepting the currency, rather than buying and holding it as a long-term retirement plan. We need more activity and less stagnation.