Last updated on September 23rd, 2016 at 05:53 pm
What does the future of money look like? If you’re reading this article, then you are either a Bitcoin fanatic, an altcoin fanatic, or are at least interested enough to do some research into the world of crypto-currency. So it’s safe to say that most of us envision a future monetary system where crypto-currency at least plays a significant role in the system, if not dominating the system entirely. Most people look at the very long-term future of crypto-currency, and see one coin as the only existing currency in the world. Whether it be Bitcoin, Litecoin, Dogecoin, or whatever crypto-currency you prefer, one will dominate the rest and establish itself as the world’s money. While this sentiment is true in theory, it likely will not be the case in reality. One of the foundational pieces of knowledge that make up the general economic theory is that all market activities tend towards a final state, or a state of rest. This principle is true for all aspects of the economy; prices, supply and demand, entrepreneurial profit and loss, even the acceptance of media of exchange all tend toward a final state of rest and equilibrium. However, while this concept is a very important analytic tool that economists use to understand the complex nature of markets, this state of rest can never occur in the real world. Market data constantly changes, making it impossible for this state of final equilibrium, also known as the evenly rotating economy, to arise in reality.
How does this fact apply to the future of crypto-currency? Well, the fact of the impossibility of the achievement of the evenly rotating economy means that it will be extremely unlikely for one single crypto-coin to establish itself as the exclusive currency of the world. Monetary history points us in this direction as well. Historically, while the global markets tended toward using a single precious metal as a common medium of exchange, gold, there always prevailed a de facto dual metallic standard. Because of the nature of the market, which we will discuss later in this article, the world markets adopted a gold and silver standard. Gold was used for more expensive purchases, as it had a higher purchasing power, and silver was used for less expensive purchases, or as fractional currency to supplement gold purchases. To put it in terms of fiat, pieces of gold were the dollars while pieces of silver were cents. The market will tend towards the establishment one, dominant crypto-currency, but it’s ever-changing nature will give rise to multiple coins being used as money on the global market. In this article, we will explore the possibilities for the future of Bitcoin– and crypto-currency in general– as a monetary system to replace the existing government-controlled structures. We will look at how competition in money in general tends to select the best currency to prevail over the world markets, and how constant shifts in the markets elicits the emergence of several media of exchange that are traded globally. To preface this article, I must state that I will be using Bitcoin and Litecoin as the two dominant world currencies in the future. I use these two crypto-coins because they are currently the dominant coins in the crypto world and are the most recognizable names in the crypto community. However, that in no way means that I am predicting that these two coins will be the two main world currencies in the future.
The Nature of Money: The Tendency Towards One Dominant Currency
To understand the tendency of the market to select the best currency, we must look at why there are multiple currencies in the world to begin with. This concept is actually very simple. It has nothing to do with governments or politics– even though historically governments have always monopolized monetary systems. There are multiple currencies because communities adopted the concept of money at staggered times; plus, the currencies chosen by the various communities reflect the economies of those societies, which are determined by the sum of the subjective valuations of the individuals within their respective communities. The agrarian society might use cows or bushels of wheat as currency; a society of hunters might use animal skins or arrowheads as their currency. As we can see, a society’s currency is initially based on the nature of the economy within that society. This is because of the fact that, at first, money has to have a use value other than its use as a money. Simply put, money must have value as a good within the community before it can obtain value as a medium of indirect exchange.*
Once several communities have established the concept of money within their respective markets, and begin using media of exchange, the division of labor expands exponentially. Indirect exchange allows for the specific specialization of the factors of production and the emergence of comparative advantage. Once these phenomena have taken place within a community, their economies begin to grow. Not only do they grow within their boundaries, but they also start to expand outside of their communities, and entrepreneurs begin interacting with businesses in other communities. We can call this phenomenon the global division of labor. The emergence of this international economy serves as the catalyst for the tendency towards a global adoption of a single currency.
As communities start to exchange with each other in this international economy, the currencies of the respective societies gain exchange value in the other communities. This emergence of an international exchange value for a single society’s currency occurs precisely because of the establishment of the international division of labor. All communities will have a vested interest in trading their goods for the goods of other communities. The use of money facilitates these trades just as it does within isolated communities, which has been covered above. Essentially, the individuals in one society will have a desire to hold the currencies of other societies so that they can purchase the goods of that society. As the international division of labor progresses closer and closer to its fullest extent, the community with that has the highest levels of production, and produces the most highly demanded goods will tend to be the community whose currency becomes the most widely accepted and highly demanded global currency. At this point, we have achieved the creation of a global currency. Let’s say that Bitcoin will be this currency, it will become so in this exact manner.
The Reality of the Market
However, in order for a society’s currency to remain the most highly demanded global currency, all things within the global market must remain equal. In other words, there can be no change in the markets, and the evenly rotating economy must be established in order for a currency to remain globally dominant forever. As we have seen earlier in this article, such an achievement is impossible. This reality is why it seems unlikely for Bitcoin to become the unitary, exclusive currency of the world. As we will see below, it is possible that as crypto-currency increases in popularity, different countries will use different crypto-currencies for a variety of reasons. The nature of the real world market will indeed tend towards a single, global currency, but the fact that the market data changes constantly will maintain the presence of more than one crypto-currency on the global market.
Applying this Monetary Theory to Bitcoin and Other Crypto-Currencies.
Let us now take this theoretical explanation of the global selection of currencies and apply it to the long-term vision that many crypto fanatics have for Bitcoin. Based on today’s purchasing power of the myriad crypto-currencies, bitcoin is by far is the most valuable crypto-coin. Because of this, we will assume that Bitcoin will be the crypto version of the global gold standard that prevailed before the rise of fiat currency. The runner up to Bitcoin in terms of purchasing power is Litecoin. While it has significantly less monetary value than Bitcoin, Litecoin has far more purchasing power than the other coins below Litecoin. For that reason, we will assume that Litecoin will be the crypto equivalent of the secondary silver standard that prevailed in the global economy before the rise of fiat.
With the prevalence of crypto-currency across the globe, we will see the tendency towards the development of a de facto “dual standard” on the world markets. Due to its much higher purchasing power, the more developed industrial nations will adopt Bitcoin as their medium of exchange. Individuals in these industrialized societies will desire to hold bitcoins because of their high purchasing power. Whereas in the poorer, less developed societies, there will be a tendency towards the use of Litecoin. Why? Because Litecoin is cheaper to mine, and can generate blocks at a faster rate than Bitcoin can. Additionally, litecoins are less scarce than bitcoins, so poorer countries with higher populations will have easier access to litecoins. For the reasons explained above, Bitcoin and Litecoin will still have purchasing power even in countries where the opposing currency is mainly used. This fact means that bitcoins will inevitably enter the poorer countries as they begin to produce goods that are demanded by the Bitcoin using countries. The injection of bitcoins into these poorer countries will accelerate their growth, thus creating a positive feedback loop of economic expansion. As they produce desirable goods, they will receive bitcoins and they will be able to produce even more, eliciting an even larger influx of bitcoins, and so forth. Once this process reaches its fullest extent, all countries will use Bitcoin exclusively. However, as mentioned above, this phenomenon relies upon staticity of market data, which is impossible in reality. This truth means that, while Bitcoin will become more widely used internationally, there will likely always be a demand for Litecoin.
Another possibility is that Bitcoin could lose its place as the dominant currency altogether. Perhaps the rich Bitcoin countries suddenly become poor, and the purchasing power of Bitcoin diminishes significantly. If that were to occur, then Litecoin would become the dominant and most valuable currency. Or maybe a significant amount of litecoins are lost or destroyed, thereby drastically increasing the marginal utility of the remaining litecoins, which would boost their purchasing power significantly. Such an increase in scarcity could result in individuals in rich countries to trade their bitcoins for litecoins, and the roles of the two currencies would be reversed. Lastly, maybe a new crypto-currency is developed that becomes more valuable than Bitcoin. In that case, Bitcoin would be relegated to the poorer countries– which would remove Litecoin from markets entirely– while the new currency would become the medium of exchange of the rich countries, and the process outlined above would start over again.
Regardless of the outcome of Bitcoin and crypto-currency in general, it is clear that we have an amazing, powerful technology that has the potential to change the world drastically. Central banks fear Bitcoin and are desperate to bring it under their control, while the world is adopting Bitcoin at a blisteringly fast rate. Economic theory set aside, the sheer intelligence put into the development of these crypto-currencies is astonishing, and we can expect an exciting ride no matter where it ends up.
*This fact is often cited by Bitcoin skeptics as a reason for why Bitcoin, or any crypto-currency, can never become money. They claim that Bitcoin can never become money because it has no use value outside of its value as a medium of exchange. This argument will be examined in later articles.