Deflationary pressures and the crypto community itself are preventing fixed supply tokens from becoming true currencies.
As some of you may have noticed, the term cryptocurrency is something of a misnomer. Aside from the unlucky soul who spent 10,000 Bitcoins on two pizzas, Bitcoin hasn’t been used as a means of exchange.
There are reasons for this, both good and bad, and they mean that Bitcoin, and other fixed supply tokens, are unlikely to be used as a mainstream currency – and that’s okay.
Deflationary Currencies Are an Economic Weak Link
Bitcoin is far from the first fixed-supply token. For centuries, humans have relied upon currencies backed wholly or partially by gold – and it has always caused problems.
Gold and other precious metals must be mined from the ground, which means that there is a limited supply. When supply pressures mount, either in the form of lowered gold yields or increased demand, this causes significant problems for governments.
An early example of this, Europe’s “bullion famine” in the 15th century. Silver was Europe’s main source of currency and supplies were dwindling at a time of high demand. This led to a shortage of credit and businesses across the continent stagnated as people were forced to return to bartering.
Abandoning the Gold Standard
A more recent example of the real-world problems with precious metals is the abandonment of the gold standard. In the 1930s, when the great depression hit people panicked. In the UK, there was a mass rush to redeem gold.
The banking system was in danger of running out of gold so it was forced to remove the peg between Sterling and gold. Other countries followed suit. This enabled governments to more easily adapt to challenging circumstances in the economy.
Bitcoin’s Similarities to Gold
Bitcoin, in many ways, represents an attempt to return to the gold standard. It has a fixed, diminishing supply. In the long term, Bitcoin will become a deflationary asset as its coins are lost in locked wallets or destroyed (either accidentally or deliberately).
These similarities mean that we could eventually be in a situation where there is simply not enough BTC to meet market demand, even if we decide to use Satoshis (a fraction of a Bitcoin) as the primary means of trade.
The Crypto Community Doesn’t Actually Want BTC To Become a Currency
The second big challenge is the cryptocurrency community itself. We often talk about how we’d like to see Bitcoin or Litecoin become a medium of exchange, but we haven’t put our money where our mouths are.
Nobody wants to be the guy who bought pizza with a Bitcoin, and almost every Bitcoin HODLer views BTC as a speculative asset, whether we want to admit it or not.
For Bitcoin – or any other cryptocurrency, for that matter – to become usable as a day-to-day asset, it needs to be stable. However, most of us are using Bitcoin as a store of value, holding it, DCA-ing into it, and not spending it. There is nothing wrong with this, but it precludes BTC from being used as a real-world currency.
It is possible that some form of cryptocurrency may become a mainstream medium of exchange. However, it will need to be one that governments feel they can trust. It will likely be built as an inflationary instrument, albeit one with a fixed form of inflation.
Some projects are working toward these goals, notably Nano (XNO). However, only time will tell if these projects will gain the support they need.