HODL Is Not Enough-Crypto Must Become an Economic Currency

If cryptocurrencies were only good as an investment, BTC might be enough by itself. But of course, the value many people see in cryptocurrency is to supplant fiat currency, including what you hold in your wallet today, how you’re paid, and what you spend at local and online merchants. As BTC leaves much to be desired for these use cases, many altcoins have sprung up to do better. And yet, for most people the only practical use or talking point of all these cryptocurrencies is as an investment.

Very nearly all the cryptos are designed to limit the number of coins that can ever be created. This guarantees deflation as demand for the coin increases. Deflation motivates people to hold their coins instead of spending it. But holding coins does nothing to actually add real utility to the cryptocurrency. In contrast, evangelizing and spending them would lead to greater circulation and realizing the promise that they advertise.

While fiat currency can get a bad rap (and rightly so) for its inflation, a small amount of inflation can be healthy for an economy as it keeps people spending or investing in real things that grow the economy and thus everyone’s way of life while earning a healthy return for the investor. Even saving fiat in a bank to get a small return builds the economy because the bank will lend your fiat out to others to build something. Privately holding crypto on the other hand does nothing for anyone except enrich the holder assuming the value of the crypto goes up.

But at some point, society may see the whole thing as a hustle: that the promise of cryptocurrency was not realized and that there is no intrinsic value. Fiat may have no intrinsic value from the paper it is printed on, but it can be used to buy goods and services. Crypto (mostly) can’t claim that. If society were to ‘wake up’ to this, the house of cards just may come tumbling down and perhaps nothing will be there to stop it.

The volatility of cryptocurrency makes it unpalatable for many. Strong advocates brave the storm and HODL (Hold On for Dear Life), but for cryptocurrency to succeed, the ordinary person who earns and spends at about the same rate has to be able to deal in crypto, and past volatility levels simply won’t permit that. Broader adoption and use of cryptocurrencies in the marketplace (not just as investments) will help not only drive up the price but (more importantly) reduce volatility as a great many more hands have a share, which reduces the proportional impact of some of the big banks or active exchange traders that seem to buy/sell large amounts with the winds of every news article or CEO tweet.

As a firm believer in cryptocurrency, I want to see it succeed. Not just as an investment or an occasional pass-through as people move fiat from place to place, but to actually use an a common medium of exchange and means to purchase goods and services online and in person. So what do we need to do to get there? 

As individuals

  1. Visit all the people you periodically exchange money with and ask them to humor you in allowing you to exchange crypto with them instead of using Venmo, PayPal, etc. This will require a great deal of effort on your part. You are taking some responsibility to help them have a good experience establishing a crypto wallet, or at least create an account on some crypto exchange so that they can get fiat from your crypto payments, or buy crypto to send you. A great execution will not only explain cryptocurrency to these people but how to exchange, hold, buy and sell it safely. In my experience, this is a very tough sell. If evangelists met a goal of converting only 3 personal relationships to cryptocurrency, I believe it in aggregate it would make a huge difference, which would cascade to ever-larger impact.
  2. For each merchant (e.g. store, restaurant, utility company) you regularly pay, very courteously ask for time to briefly meet with the owner or manager and briefly make the case for cryptocurrency. Try to keep specific cryptos out of the conversation until the end, assuming it goes well. As a community we should prepare and share materials that make successful presentations. We need to make the case in business terms. We might start by asking them how a 2-4% jump in profitability would impact their business. An interested owner would need information on how to liquidate crypto payments (probably immediately upon receipt), how to fulfill local tax laws, how to handle returns, and exchange rates. They will need software and training. Some services already exist to make some of this easier, and given that’s the best we have for now, we should recommend these. But ultimately these merchant services bring back some of that bank fee that we baited them with being rid of, so I’d like to see locally installable software at each of these merchants that handles everything locally so that no extra fee comes out of the bargain.
  3. (U.S. only) Push for IRS tax laws to change. It is absolutely a blocking issue that every sell or payment in cryptocurrency is a taxable event. For folks who trade stocks, they may have a few dozen sales to report for a year. Day traders would of course have much more, but they have training and the tools they need to track and report this. An ordinary working family has none of these. To expect them to record tax lots for every cryptocurrency purchase and then associate every single payment made with that crypto and associate it with one or more tax lots and then report potentially many thousands of these taxable payments on a tax return is unthinkable. No ordinary user can be expected to comply with these laws, not because they are tax evaders but because the complexity is too high. But I think the only way the IRS will revise their assessment that crypto should be considered an asset rather than a currency is after we as a community start thinking of it and using it as such. Getting merchants to take payments like this so the hard-core crypto activists can pay theses merchants with crypto (and diligently fulfill tax law) may help drive this forward.

And by the way, for HODLers that won’t spend because they think their crypto will go “to the moon” and thus don’t want to spend now for fear of missing out, the solution is simple: replace whatever crypto you spend by buying more. Your crypto balance will remain the same, you won’t be out anything because you’re spending crypto for what you would have spent fiat on anyway. But now you’re spending crypto, and using fiat to buy more crypto. What’s not to like? Yes, in some jurisdictions you may own capital gains tax each time you spend crypto, but you would owe that no matter how or when you spend or sell your crypto. In a progressive tax system like we have in the U.S., the best way to part with your crypto is in small increments, so spend that crypto!

As cryptocurrency designers

  1. Reevaluate the deflationary design of cryptocurrencies. Let’s have conversations on how to design a cryptocurrency that may have predictable, limited inflation that cannot be changed by public policymakers and therefore manipulated. Deflation primarily enriches the early adopters, which erodes trust in the news and by latecomers. This strikes me as an extreme technical challenge, because maintaining a specific inflation rate would require a bridge into the real world, leaving trustless cryptography and entering policymakers’ domain, which cryptocurrencies actively seek to avoid.
  2. Actually scale to hundreds of thousands of transactions per second in the core. Very few cryptocurrencies even have a plan to be able to touch this. Each of these currencies would fall flat if it started getting even a small fraction of the traction that a major credit or debit card has today. Any single block chain (with a max block size and block rate) seems unlikely to ever achieve this goal. IMO Lightening networks as a “layer 2” is not good enough, as they create artificial cohorts and rely on trusting something outside the security designed by the cryptocurrency itself.
    Those cryptocurrencies that are designed to scale to this level in theory may not in practice be ready for it yet.
  3. No compromises on privacy. Any cryptocurrency that allows someone I pay to see the balance or other payments on the address it came from is a non-starter. That’s so much worse than an end user sharing their finances with their bank. Having so-called “privacy coins” is not only for the black market. We have fiat which is already used for that, and we have banks that we trust to keep our money safe and private. Switching to cryptocurrency shouldn’t require giving up on security or privacy in any respect. And we could do with some improvement in that area. Some coins do this quite well. Any coin that doesn’t have these features at least as an option should upgrade their systems or get off the market.

Conclusion

The challenges we have ahead are very large. Some of them may be naturally addressed by profit-driven businesses, but most or all of them will require a great deal of evangelism and better app development than we’ve seen so far, particularly for the use cases mentioned above that thus far tend to be overlooked.

Without this work, crypto may only succeed as an investment vehicle, and it may even be a poor one at that. That isn’t what crypto was designed for. Let’s not settle for less than cryptocurrency as a currency!

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