J.Charles Gasche


How cryptocurrencies can finally bring value to markets

TL;DR: The reason for which currencies are, or aren’t used, is never a purely technical reason, while developers keep differentiating their cryptocurrencies with technical features.

Bitcoin pushed its record high valuation higher again this month! Who believes that cryptocurrencies will replace all existing currencies and be a viable alternative to government-issued currencies now?

Market Cap of bitcoin

Well, all cryptocurrencies are not created equal. What’s disturbing in cryptocurrencies today is that despite their insanely high market capitalizations, almost no cryptocurrency is primarily used for what it’s supposed to: trading goods and services. When their value/market cap is going through the roof, it’s because investors hope that they will eventually evolve into something that people will use to trade goods and services, which would stabilize their value at a level higher than today. But let’s see why it is not the case today.

The value of a currency is usually a measure of how much people trust they can use it

Anything is a currency if you believe it. For the Aztecs, it was Cocoa beans.

A currency is by definition something that:

(1) Sets a price reference
(2) Can be used to exchange goods and services
(3) Can be used as a storage of value

What’s important to note is that these conditions are always met at a certain defined place (on a market), and within a certain time interval.

Even for government issued currencies, these conditions are true only on the currency’s home market, which happens to be often delimited geographically, but not always. The Swiss Franc for instance meets these conditions in Switzerland but also in neighboring regions of France, Italy, Germany and Austria. Indian Rupees and Russian Rubles also fully meet the requirements on their respective markets. Yet, earlier this year, I wasn’t able to exchange my Indian Rupees for Russian Rubles at a decent rate anywhere in Moscow. Because Russia’s trade with India is relatively unimportant, Rupees are less exchangeable against goods and services on this market, which decreases their value. As such, the Rupee does not represent a currency on the Russian consumer market.

No currency is a currency in a vacuum. Currencies exist on a specific market.

Most cryptocurrencies don’t pass the test for being a currency on any market at all. Almost no cryptocurrency succeeds at being a price reference (1). All prices in coins are always converted from their dollar value before a transaction happens. Most of them also fail at being convertible against goods and services (2). None of us could survive or run a business on any market if our revenue was to be spent only in any of these currencies. And (3) can only be met if the first two conditions are met, in the case of currencies.

In fact, I counted the number of merchants online who are willing to take the top 30 cryptocurrencies (with market caps ranging from $200M to $7B+) as a form of payment:

  • <10'000 businesses accept Bitcoin in the world*
  • <500 businesses for each other currency than Bitcoin and Ether (more likely <<100)
For some currencies I could not even determine if there was a market at all

Coins fight over which one has the best technical performance, not on solving any subset of users’ problem

“Having No Specific User in Mind” was listed years ago already by Paul Graham as one of the 18 mistakes that kill startups. YC even has t-shirts to make sure they never forget to “build something people want”.

Cryptocurrencies need adoption in the same way any other digital product does and hence should solve the problem of someone to be successful. Yet a majority of cryptocurrencies seem to be aimed at solving the problems of the whole world at a time, failing at achieving currency status on any market.

How I perceive some cryptocurrencies have differentiated

Back in engineering school, we were taught that if you gave the same problem to solve to 3 different engineers, say an electronics engineer, a mechanical engineer, and a software engineer, you would end up with different 3 solutions to this problem: one using electronics, one using mechanics, and one using software. All solutions are valid, as long as you end up solving the right problem: the one that matters to your customers.

The top-30 coins with the highest market capitalizations are almost all competing over their technical specificities like the size of the blocks, confirmation times, safer encryption or safety in the case of rare kind of attacks. But is it really what is stopping a market from adopting them today? I would say these coins are primarily solving the problems that the engineers writing their code see.

“You’ve got to start with the customer experience and work backward to the technology” — S. Jobs

A Steve Jobs video that deserves your time more than its title could let you think (5 min)

Ripple is an example of a currency that was developed with a specific subset of users in mind, that would get tangible benefits from using a cryptocurrency. Ripple is targeting a specific market and marketing itself using the market’s language, showing relevant benefits to its audience.

The value of all Bitcoins in circulation today ($102 billion) is greater than the value of all Swiss Francs in circulation in cash ($79 billion), and in the same order of magnitude as the Swiss Franc money supply (M1 of $641 billion), and yet the Franc is considered one of the most stable currencies of all times, while Bitcoin is considered one of the most volatile. The scale of Bitcoin has reached is not what’s needed to succeed at being a “real currency”.

Stability will be reached when a majority of the members of a market will do business mostly through the new currency

It’s not the tech that should be tuned, it’s the market. There are a legion of markets and industries that would benefit from the pros of cryptocurrencies without suffering from their current limitations. The priority is to start with a market that’s small enough so that it’s possible to get a toehold and convert a majority of the parties quickly. After covering a majority of the transactions on this market, it will be possible to expand to neighboring or similar industries thanks to the added trust.

What to start working on

There is a bunch of industries that we’ve looked into, each with a few, easily accessible parties, that can all be reached and potentially converted. If you have knowledge of an industry that matches the criteria, what industry do you think should be targeted first?

Thanks to Aymard Dudok de Wit, Joy Zhang, Lynne Tye, Varad Kishore, and Alexandra Alimbekova for reading drafts of this.

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*with the exception of a chain of Japanese convenience stores. Bitcoin is a succeeding outlier in this comparison I am making. — Data might not be perfectly accurate with day to day fluctuations, don’t hesitate to let me know if you have different information that might impact the point.

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