You’ve likely noticed the volatility of the crypto-currency market. You’ve also likely heard about the usage of crypto-currency on the black market and the day-trading-like activity in the recent booms and busts. However, I think these are symptoms of the current abstract state of the market.
Currencies can be stabilized when they’re linked through market forces to real commodities. This can also occur when a currency is accepted for services. With a growing acceptance of cryptos for services, a currency becomes tied to real survival-class commodities because the humans providing those services can only accept a survivable rate of pay. A service provider might say, “I can’t render you a service if I can get a better rate of return with subsistence farming.” In other words, it’s not a sustainable model. When we see the growing acceptance of crypto-currency for services, bug bounties everywhere for games of all sorts, subscription services that include real and virtual goods and services, which shows a growing acceptance that people will be faced with having to charge a survivable rate. They must also decide whether it’s worthwhile to tighten their belts and hold their assets as it grows in value, in the case of a boom. These factors will help define the boundaries of an acceptably volatile market. If speculators drive up the value artificially, it will be pulled back down as there will be fewer services available because people can just hold their assets instead of producing value through labor. If a bust drives the market down as speculative trade subsides, a floor is set and labor can only accept a livable wage.
In the absence of regulatory influences, or being based on debt, a currency is going to be inherently more volatile, but not completely out of any control like a sail in a storm. The floor of acceptable value is based on the need for survival commodities. The limit on volatility is determined by whether one should trade or #hold based on which will generate more value. Both come together to create a situation for modest, yet steady inflation. This may or may not be a problem. We’re kind of into theoretical economics here. The point being that acceptance for real goods and services can act as an anchor to check against volatility from speculative trading. The inflation though can be held in check by scarcity.
Most crypto-currencies have a finite quantity that will ever be available. This reserve of yet to be available currency is in the yet unmined coins. Miners get coins by processing complex math that benefits the blockchain in exchange for being rewarded with coins from the “reserve”. The differences in many currencies lie in the difficulty to mine new coins, how much is rewarded for the work of mining, and the finite number of coins still available. If you’re wondering, miners benefit the blockchain by processing transaction logs of coins already on the network. Thus, they can also charge a transaction “fee.” This way there is still incentive to continue processing, even when all coins have been mined. However, the finite number, at least in theory, will act as a check on inflation because it will have to be distributed across the economy to account for its total value. This process will actually act as deflation like when labor generates new value: the same finite quantity of currency will have to be revalued to include the additional coins. This effectively makes everyone’s currency more valuable as there is more value available for trade. Weirdly, we see the basis of a viable strategy for an infinite positive sum-game as defined in Game Theory. Ironically, this is much like the Judeo-Christian Western ethos of teaching people to fish.
I know currencies like Dogecoin have no finite value. This complicates things but I think that Dogecoin market is more like one based on debt because you could infinitely leverage future value from the expectation that more currency could always be mined. I think this might actually serve to establish a minimal generation of value in order to be meaningful to the market. This would act as a check on rent-seeking behavior. Why should I pay anyone for something that is not at least as valuable as mining the currency? Similarly, this is checked against devaluation, as I would have to eventually buy survival commodities to be able to continue mining for more currency. Mining can’t become more valuable than a similar amount of labor to maintain subsistence farming. I’m trying to account for the inherent labor saving benefit of maintaining computers to mine crypto-currency versus laboring as a farmer. I think all this would just ensure that farmers at least are paid well enough to want to farm, and couldn’t be ruined by a currency devaluation as they would naturally concentrate currency in their trading for food. They could never get too exploitative by needing to trade for other survival commodities and maintenance of their farm.
Overall, the growing acceptance of crypto-currency should help to stabilize the market. This will lead to wider acceptance, further stabilizing the market. I think the adoption is inevitable.