It’s been three years since the start of the Bitcoin bubble of 2017. While the price hasn’t yet recovered to the highs we saw then, it’s certainly looking strong. Over the last three years, we’ve seen some retailers begin to accept it and other cryptocurrencies as a method of payment, while some businesses have even begun paying their employees in the token of their choice.
We’re still a long way from widespread adoption though, so what will it take?
The History of Commerce
The way that humans have conducted business amongst themselves has changed many times throughout history. It started out with people bartering with each other. This worked two people agreeing amongst themselves what each party would trade.
For example, if a shepherd wanted to buy some bread he would need to find a baker that wanted to acquire either some wool, meat, or a whole sheep. They would need to agree on a fair exchange of loaves to wool/meat/sheep.
This would be problematic when the shepherd couldn’t find any bakers that needed what he had to trade, or if the baker wasn’t willing to give up enough bread in exchange for a sheep.
The solution to this was to create some sort of money. This was often done with precious metals and goldsmiths became some of the first issuers of banknotes, though Romans and other ancient civilisations had been using coins for much longer. By using these agreed-upon currencies as a vehicle for transacting, it became much easier for merchants to trade with each other as it no longer mattered whether the baker wanted to buy some wool, you could just sell the wool to someone else and use the money to buy the bread you need.
The currencies we’ve used have changed a lot over the last few hundred years, with evolving economic theories moving currencies to and then away from the gold standard, in favour of fiat currencies.
While dollars, euros and pounds are how most people transact today. Many people still like to buy gold and other precious metals to hedge their assets against inflation devaluing the cash they hold. More recently, Bitcoin and other cryptocurrencies have become another form of scarce asset people have looked to to protect themselves from these economic forces.
Cryptocurrencies: A Store of Value of a Currency?
You couldn’t walk into your local supermarket and hope to pay for your groceries with a gold sovereign. This is because, in most parts of the world, gold is no longer a currency but a store of value.
Cryptocurrencies currently sit somewhere between these two categories, having the scarcity required to protect them against inflation while being accepted as a payment method in some places.
However, at present, the adoption of Bitcoin for day-to-day transactions remains low. There are several factors that affect this.
The first is the volatility of cryptocurrencies. Bitcoin can fluctuate in value as much as 8% in just the space of a few months, while the dollar and other fiat currencies typically move fractions of 1% over similar periods.
The second factor is critical mass. In Silicon Valley, this refers to a venture acquiring the minimum number of participants to maintain it successfully. For Bitcoin and other cryptocurrencies, widespread adoption will likely happen when a large enough proportion of people begin accepting it, encouraging others to follow suit. It doesn’t look like we’re there yet, but we’re still heading in the right direction.
Online transactions are likely where we will see widespread adoption of cryptocurrencies before they move into the real world. While there is some adoption of the technology at the moment, most consumers still can't use Bitcoin, Ethereum, or other tokens to pay for physical goods from retailers or deposit money to play most online casino games. Instead, we are seeing a small selection of businesses that have been early adopters, either because they want to cater for the demographic of customers that like cryptocurrencies or because the owners are enthusiasts themselves.
Anyone who understands cryptocurrencies will know that there are many security systems built into the network. The public ledgers help to keep the entire system honest, while cold storage and tools like two-factor authentication on exchanges can help to keep your own tokens secure.
However, news articles about cryptocurrencies being stolen and exchanges disappearing overnight, as well as the general unfamiliarity with the concept create distrust among some demographics.
As the technology proves itself, more people will begin to develop trust in cryptocurrencies.
The final factor that will make a cryptocurrency become accepted as a means of exchange is time. The currencies that we use today have (in most cases) been around for hundreds of years. They’re ingrained into our culture, and therefore easy for us to understand.
Cryptocurrencies are a little over a decade old, and therefore have a long way to go to catch up. That’s not to say it’ll be hundreds of years before you can buy your milk with Bitcoin, but you’ll likely have to give it a little more time for people to get used to it and become familiar with how it works.
Cryptocurrencies are significantly younger than traditional currencies, so it’s therefore, unreasonable to have expected them to replace the dollars, pounds and euros in our pockets.
Instead, the adoption of Bitcoin and other tokens as a method of payment will take time, just like other forms of exchange have done in the past.
In the meantime, holding cryptocurrencies, like gold, could be a crucial part of your investment portfolio as a way to hedge against inflation.
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