PATH TO CRYPTO CURRENCY CONVERTIBILITY

As Bitcoin price now stands at 640 dollars some of you perhaps remember when Bitcoin started to appear in mainstream news not too long ago and its price was 2 dollars.

Since then a lot has changed, but in another way everything stays the same. Bitcoin community has grown and along with it the broader crypto currency environment. New coins are introduced almost on a daily basis. Conservatively, there are over 700 crypto currencies out there, while according to some estimates there are more than 3000 of them.

Market capitalization of all coins is estimated at about $12bn, while total daily crypto currency volume stands at $64m. This means daily volume is 0,5% of total capitalization. Average Bitcoin daily volume stands at about $30m.

 

CRYPTO COMPETITEVNESS

Encouraging news for crypto currencies is relatively high daily float, which points to capability of these tokens to deliver great velocity of money. This should be one of the strongest advantages of crypto currencies anyway.

Furthermore, in the expanding decentralized blockchain ecosystem coins like Xaurum are trying to increase their competitiveness in comparison with fiat money by backing coins with physical gold. Although these ideas are interesting, the actual absolute volume of any of these coins is very low by developed capital market standards.

Blockchain is compelling, but its main appeal may not be as a candidate for store of value. Technology itself could be the path through which current economy expands into the future in logistic terms, not necessarily representing money itself.

 

CONVERTIBILITY CHALLENGES

Very big problem for crypto currencies is their convertibility. If something is supposed to be money, a store of value, it ought to be convertible in very large amounts and optimally with continuous frequency into all other existing competing forms of convertible money. Convertibility of crypto currencies is simply not there. In other words, it is difficult to convert $10m worth of BTC into anything without significantly impacting the market price structure for example.

BTC is lightly convertible into USD and somewhat into EUR, but convertibility into all other major currencies is recreational at best. Furthermore, none of exiting crypto currencies is convertible into risk currency. For example, one cannot easily short a crypto currency.

All combined, portfolio risk management is all but impossible for now in the world of crypto currencies. Consequently, it is not surprising they have not been more widely adopted by professional financial and investment community. These factors deter portfolio managers from investing conservative money into crypto field.

 

PURCHASING POWER STABILITY AND CONTROL

Next big issue for crypto currencies is the purchasing power stability they have difficulty providing. It is said that with increasing capitalization and volume the prices of these currencies will be more stable, but there were no hard monetary arguments presented to back such claims anywhere.

Purchasing power stability is not necessarily about convertibility. True, it is related, but the origin of this problem is existing crypto currencies don’t produce. Furthermore, nobody appears to ask themselves what will happen to the decentralized economy when holdings of crypto currencies will concentrate? Fiat system has a safety mechanism for such occurrence. It is called discretionary money printing.

Crypto currencies will need to learn lessons of past gold standards, which did not survive since long-term productivity trends in the economy can dictate structural money supply inadequacy. In simple terms, without proper flexibility of money supply crypto system could turn into mercantilism, a very aggressive form of economy type. This would be perceived as extreme capitalism, economy type crypto currency field is trying to differentiate itself from. Crypto field is in the beginning of thinking itself thru these complex matters.

 

PROTOCOL COMPATIBILITY

Another missing link from crypto currencies is complete lack of FIX Protocol compatibility. This means that they are not easily implemented into trading platforms and systems. Existing crypto currencies would be more attractive if they provided connectivity compatible with current standard. Lack of this standard makes them difficult to reach and not as flexible. It also makes transition to more intensive use of them in trading environments less practical and much more expensive. Since there is no available FIX Protocol compatibility crypto currency volume is suffering more than it otherwise probably would.

 

NEW HORIZONS

That said, when blockchain will be perceived as highly efficient and decentralized registry, focus will turn to what kind of content is necessary for something to be optimal money. These are ultimate convertibility, deep liquidity, competitiveness, high velocity potential, productivity, flexibility and purchasing power protection to name the main ones among many others.

Blockchain has the potential to help bring about new currencies with all the listed characteristics. There is a very good probability new more advanced currencies will emerge. During this time existing crypto field will experience transformations and intense selectivity among coins of which ultimately only a few will survive.

Gregor

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