How Will The Bitcoin Mania End? Part Deux

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Cullen Roche
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This is Part 2 in my series on cryptocurrencies and how I think they’ll change the economy. In this post I will discuss why I think crypto will lead to a peer-to-peer economy. 

In my last Bitcoin post I made a few big points:

• Bitcoin is the current reserve currency coin in the cryptocurrency space.
• Bitcoin’s lack of par settlement is a tremendous problem and potentially a fatal flaw.
• Blockchain tech and decentralized apps are bigly important and will transform many industries by cutting out middlemen.
• Some crypto transactions will not be consistent with public purpose which will force the government to get more involved in all of this over time.

I want to expand on a few of those points because there’s an interesting potential development here that is the center of this post:

The government will not be able to stop the growth of a decentralized peer-to-peer economy

I previously theorized that a reserve cryptocurrency that doesn’t settle at par is a huge problem. No one wants to transact in a currency that doesn’t settle at par. Par isn’t generally thought of as a price, but it’s actually the most important price in the whole economy. You just don’t realize it because it doesn’t change. But everything else changes relative to it. This is why I believe a stable coin will become the center of the entire crpyto ecosystem at some point. We are in the Netscape phase of the crypto world. Everyone thinks Netscape (Bitcoin) is the next big thing, but Internet Explorer hasn’t arrived on the scene yet. It’s coming. We just don’t know what it is yet.

Par settlement is essential for a reserve currency so a viable stable coin that is pegged to the USD (or other currencies) will develop.² It must develop. Consumers don’t want to transact in a volatile asset, but corporations definitely don’t want to accept a volatile asset. For instance, everyone keeps asking when Amazon will accept Bitcoin? My guess is that they never will (or if they do they’ll stop) because you can’t generate revenues in a currency that rises and falls by 20% in a matter of hours.¹ For instance, if you generate a $100 sale in Bitcoin and the price falls 20% the next instant then your entire profit margin could be wiped out. Accepting volatile assets as a means of payment is a bad way to run a business. That’s why stocks and other volatile assets have a low level of moneyness – they’re too volatile to serve as a viable medium of exchange. So my guess is that Bitcoin’s most attractive feature at this point (its volatility) is also what will keep it from becoming what many people think it can become (a viable medium of exchange that rivals the USD).³

Now, what happens when you create a stable coin that is pegged to the USD and acts as a synthetic USD? Well, the first thing that will happen is that the US government is going to want some of the action by making sure they can still tax these transactions. This is important because the US government is not going to cede sovereignty of the USD to a decentralized technology. So the first thing they’ll do is ban transactions in this coin at all corporations. Amazon will literally be barred from transacting in this coin. Sounds crazy but it actually needs to happen. Here’s why:

• A synthetic USD that corporations accept that operates on a parallel system will be massively inflationary. You’d have two money supplies and the US government will have lost control of its ability to fight inflation.
• The potential loss of tax revenue would be highly destabilizing to the USD and the government’s ability to operate. We need a military and firefighters, etc. You can’t have a decentralized currency at the center of any modern society because centralization is essential to how governments operate.

But this doesn’t mean crypto won’t change the economy in many other ways. For instance, the sharing economy is ripe for disruption here. Imagine a world where you have a decentralized Airbnb app where you can find a place to stay in another city. You won’t pay Airbnb service fees, taxes or anything. You will just pay peer-to-peer in a synthetic USD. You’ll go directly to the homeowner, pay them in a stable coin and avoid the government middleman and any corporate middleman. There’s millions of various applications that will spur a peer-to-peer economy. And that’s the big takeaway here. These currencies will create a whole new peer-to-peer economy. In a strange sort of way, we will all become our own little corporations because this monetary unit will make that more feasible.

This will be even bigger in undeveloped countries where the economies are already much more decentralized and the currencies are often a mess. Imagine living in Venezuela right now where there is crazy hyperinflation. A black market for this synthetic USD will develop and it will give people the ability to buy goods and services on a black market for price-stable goods. That’s a world changing option that takes so much centralized currency risk off the table.

We are moving from a centralized economy to a peer-to-peer economy. And that’s a good thing because this economy needs more autonomy from corporate/government interests and its many constraints.

¹ – Yes, Bitcoin will probably become more stable as we approach the full issuance of 21MM BTC, but that doesn’t change the fact that it’s an asset built entirely on a network effect as opposed to cash flows. This means it will always be volatile relative to a pegged currency. 

² – This has been tried by some, but has not become viable yet. 

³ – This does not mean that BTC is worthless. It just means that BTC will not always be the center of the crypto ecosystem. Instead, BTC will probably remain some version of “digital gold” operating as a scarce digital resource.