Cryptocurrency as Media of Exchange

The promise of cryptocurrencies as media of exchange has not arrived, even after achieving tremendous popularity. (Note: I have updated this article.)

Why?

You have in your latest smartphone device wallets not only for Bitcoin, but also for a number of other cryptocurrencies like Ethereum and NEO. You have gone cryptocrazy, having bought bitcoins and ethers just a few months ago. Your life-partner is worried, but you are excited because those bitcoins and ethers have at least doubled in value. You are in a major metropolitan area (Seattle) and you are raring to go spend some satoshis at a nice restaurant. Or are you?

This scenario is clearly fictional. The truth is that you’re just happy having bought cryptos at the right time. Some facts are getting in the way of spending your cryptos like dollars:

1. At the moment, there are only thirteen business establishments in Seattle willing to accept your cryptocurrency payment, according to coinmap. It looks like none of these vendors is a restaurant.
2. If you use Bitcoin satoshis to pay for dinner, you may have to linger for at least an hour more at the restaurant after paying. It may take that long for your payment transaction to be confirmed by the Bitcoin network. With Ethereum, it requires a little less waiting time, but it’s still agonizingly slow.
3. Just an hour ago you checked the exchange-rate trends of your cryptos against the U.S. dollar, and got tickled by the steep uptrend. Are you going to spend your cryptos when these are increasing in market value? You are not crazy after all: you’ve heard that story about some foolish guy years ago who spent 10,000 bitcoins to buy a single pizza.

Number one above is what I call the chicken-and-egg problem of cryptos: either enough people have cryptos in their pockets to spend, or enough vendors are willing to accept cryptos as payment. I think we have enough people who have bought cryptos (there’s now enough supply of cryptos in people’s hands), and it’s about time we work on increasing the number of vendors that accept cryptos. In other words, let’s work on the acceptance side of cryptos, as opposed to the usual spending side. Previous attempts to get people to use cryptos in their daily lives consisted of making it easy to convert cryptos to fiat money. If we believe in cryptos, why lead people back to fiat? When cars appeared in the streets as novelty rides, the first ones that people built looked exactly like horse-drawn carriages. It’s only when we forget about fiat money that the use of crypto as money becomes its true use case.

Number two is a temporary problem for both Bitcoin and Ethereum. Solutions have been promised and are forthcoming: Lightning for Bitcoin, and Plasma for Ethereum. Plasma promises at least a million transactions per second for ethers to fly around.

Number three is a more complicated issue. The reason you are more comfortable spending dollars instead of satoshis is because you know that tomorrow, a dollar will still be worth the same value as it is today. On the other hand, a satoshi can jump in value by tomorrow.

Why Can’t Cryptocurrencies Stabilize in Value?

I think a cryptocurrency will be successful as medium of exchange to the extent that it is managed as a medium of exchange. The most important “monetary policy” for any crypto to be a medium of exchange is that its quantity (number of units in circulation) must change in proportion to how many people are using it, and the movement or velocity from one holder to another. If a cryptocurrency does not increase in quantity according to demand, then naturally its value will increase.

In this regard, I think Bitcoin has the worst monetary policy because its quantity is cast in stone and not even its managers can increase the total count of bitcoins in circulation beyond 21 million bitcoins. Think about it: Bitcoin will always be in an uptrend because its projected quantity is hard-limited. It will crash like it did in late 2013, languish for a while, and then shoot upwards again. People will only think of spending it when it is languishing in market value.

In contrast, Ethereum is not hard-limited in quantity. Right now it is increasing in quantity through mining, just like Bitcoin. Pretty soon it will be increasing in quantity through proof of stake; meaning, people who already own ethers can choose to “deposit” those with a proof-of-stake miner in order to earn “interest”. (This is not like interest earned by putting your fiat money in a bank because the interest you earn in this case is not paid by some borrower, but by the Ethereum network.)

[Update: Vitalik Buterin has decided to limit the quantity of ethers to 120 million. Right now there are about 100 million ethers. This means that ethers is now not much different from bitcoins in terms of monetary policy. Because of this we have revised our plans, and I am writing another article about it.]

Another good candidate to be a universal medium of exchange is Bitshares. The problem I see with Bitshares is that the number of people who hold it is still very few, and I think what’s preventing it from becoming popular is precisely its adoption of a “stable value” monetary policy too early. The strategy should be a monetary policy of deflation to gain the interest of the crowd (just like Ethereum), and then gradually transition to a monetary policy of inflation until a stable price is achieved. This strategy can only be implemented by those cryptocurrencies whose quantity can increase, and Ethereum right now is on the right path.

If we target Ethereum for wide use as medium of exchange, are we excluding the use of other cryptos for daily commerce? No, because it is now just as easy to send ethers as it is to convert from another crypto to ethers. If you hold bitcoins, but a vendor can only accept ethers, easily convert some satoshis to finneys, and pay the vendor using your finneys.

How to Improve the Acceptance Side

Wallets are mostly free, and so vendors in your city should be scrambling to install wallets in their smartphones in order to accept cryptos. This is clearly not happening, even for Bitcoin which has been in existence since 2009.

We have talked to a few vendors to find out why.

“I have just invested in a brand new credit card machine, and now I have to buy a funky new one?”

“I’ve heard about Bitcoin, but I don’t know much about it. What is it? Is it real money?”

“I’ve heard about Bitcoin, and I don’t trust it. I hear people can lose it easily.”

The only way to improve the acceptance side is to go out there and sell the idea. Initially, it’s going to be a hard sell, but eventually vendors themselves will be scrambling to look for a way to accept cryptos safely. We need to get into this business while it’s still just an idea, this business of increasing the acceptance side.

I believe that if vendors can be enlightened on the safety and reality of cryptos, they will want to increase their customer base by accepting cryptos.

Who can possibly convince the vendors? This is where you come in. You are a potential Ethereum evangelist rock star.

I invite you to help convince vendors in your city to start accepting cryptos. We have built a very simple POS app that is designed to be safe. We are going to establish a territorial system to limit your competition in the future. It is time for you to put a stake in the ground for your territory.

What’s in it for you?

Every POS app you install at a vendor entitles you to exactly 0.8 percent commission for every transaction that goes through that POS app.

The total transaction fee to be paid by the customer of that vendor (not the vendor herself) is less than 1.5 percent, and that already includes network gas fee (fixed at about half a finney per transaction) and Pure Money Technology’s 0.2 percent commission. Imagine that: 1.5 percent! This is very competitive against credit cards, without even mentioning that it is added to the customer cost, not the vendor’s.

Take a look around the Pure Money Technology website, and we’ll keep in touch.