A month ago I had written a blog post in which I introduced this idea called The Cryptocurrency Singularity. The article became more popular than I expected and I got the chance to get input from many smart people.
This article introduces the same topic but with a little more detail about how we will reach this singularity. It is written in a way that the readers would not need to refer to the original article. I decided to write another version with my thoughts more clearly organized, with updated data, and to address the different objections readers have raised.
The AI Singularity describes a point in the future when we finally create a machine that is smarter than we are. When there’s a machine that is smarter than we are, it is able to create a machine that is smarter than itself. By virtue of speed alone, because these machines perform millions of times faster than us humans, we will have an intelligence explosion — the process will get away from us.
The Cryptocurrency Singularity describes a point in the future when cryptocurrencies, or a subset of them, become a better store of value than fiat currencies. When cryptocurrencies become a better store of value, significant money will flow into cryptocurrencies, increasing the supply of fiat currencies. When sufficient fiat currencies are given up for cryptocurrencies, a vicious (or virtuous) cycle starts. Fiat currency value will drop due to inflation, prompting even more people to convert their money into cryptocurrencies .
That’s a big statement. We see this behaviour all the time, though. When people move between networks, there comes a tipping point where enough people move and the movement of people snowballs.
Think myspace and Facebook. Or, perhaps even a better example: an assessment made by the U.S. utility industry about how Solar panels could destroy U.S. utilities. The gist of it is that the more people use solar energy generated off the grid, the more expensive it is for the rest of the customers that are not generating their own energy. As it becomes more expensive for them, they get pressured into jumping ship, further increasing the vicious (or virtuous) cycle.
This human behavior feels intuitive. After all, why stay in a network when the network is becoming less valuable?
When it comes to money, you could ask: who wouldn’t change their money into a form that degrades the least over time? Something similar enough is seen in the real, ancient world of metal coins, but in a different set of circumstances. It even has a name — Gresham’s law. The best example I have seen is the one of the ancient Greeks.
Athenian Inflation
Around 400 B.C., the Athenians lost control of their silver mines. The Spartans had taken over. This was a problem for the Athenians because they used the silver to mint coins to pay their soldiers and government workers. Instead of giving up, they melted the silver coins they had and used the silver to plate copper coins.
Stamping these coins with the same face value, they used this as payment to their soldiers and employees. As this money circulated the economy, the hoi polloi noticed that some were lighter than the others. Upon closer inspection, they realized that the lighter ones had a thin plating of silver instead of being solid silver.
Come market day, they naturally parted with the coins that were lighter, and kept the solid silver ones safe in their pockets. As this societal behaviour continued, the solid silver coins would be found in the wild less and less as the copper ones stayed in circulation. Because the silver coins became more rare, their price went up in relation to the copper coins — which the Athenian government continued inflating, by the way, because they had bills to pay.
Applying Gresham’s Law to this scenario, the solid silver coins are the “good money”, and the copper coins are the “bad money”.
Gresham’s law is a monetary principle stating that “bad money drives out good” — Encyclopedia Brittanica
Gresham’s Law is used to describe two coins with the same face value but with different commodity values. Although we no longer use metal coins today, you can still see the effect of the law by answering this simple question:
If you had currency A that loses 5% in purchasing power year over year in one hand, and currency B that retains its purchasing power in another, what would you spend to buy your next cup of coffee?
Now, replace “currency A” with your government currency, and “currency B” with cryptocurrencies.
As you may have guessed, I will make the connection to Gresham’s Law when comparing cryptocurrencies and fiat currencies. This connection is not clearly seen on the surface though, because for most people, the two currencies are functionally too different. However, when certain qualities are acceptable to people, they will be comparable enough. At that point, it will be reasonable to convert their money to a more durable form.
If you doubt that this singularity will ever be reached, then you probably doubt at least one of the following assumptions:
- Cryptocurrencies’ volatility will keep declining until it becomes as stable as major fiat currencies
- The technical community will continue increasing cryptocurrencies’ transaction per second limitation
- There will be continuous usability improvements
- It will continue to get easier to exchange fiat to and from cryptocurrencies
Assumptions
As these assumptions continue to be true, the more similar they become in ways that matter for Gresham’s law. There will be a point where the differences are so minimal that they will be comparable to having solid silver coins in one hand, and the silver coated copper coins in another.
Volatility
We have cryptocurrencies like bitcoin, but why haven’t most people moved their wealth to that form, even with the crazy rise in price?
Being creatures of habit, we are creatures that enjoy predictability. Only a handful of people are okay seeing their net worth fluctuate daily. Only a handful of people are comfortable paying for a bill with currency that a week before was worth twice as much.
That’s how it feels today for most people, but let’s look ahead. What does the data show about the future of bitcoin’s volatility?
It’s clear that the trend is downwards, and if this continues, BTCUSD volatility will match USDNZD volatility in about 10 years.
I compare the volatility in terms of USD because that is the world reserve currency. When bitcoin reaches those levels of stability, when it comes to volatility alone, it will make sense for the masses to begin migrating their money to bitcoin.
Know that there is no time limit here. There is no “too long”. It could take 50 years for <insert your favorite cryptocurrency> to get there.
Scalability
If you’re anything like me, you do not want to wait a few hours or even days to pay for your electricity bill. If the network doesn’t scale to our needs, then you may always have to keep a chunk of your money in a more easily accessible form — the cash in your pocket.
If a person uses cryptocurrencies primarily as a store of wealth and converts to fiat currencies as they need to spend it, then we will see significant increases in transaction volume. Being networks that “don’t scale”, this will be a problem.
For bitcoin, there has been a lot of work on scaling (and a lot of debate as well). Some examples in Bitcoin are Lightning Network, SegWit, and bigger blocks. The answer may be one of these, a combination, internet of ledgers, or other things that have yet to be invented that live on top of these.
Whatever the solution is, remember that the tech community has been able to scale the Internet to the way it is today. It used to not be able to handle things like Netflix.
Usability
Let’s face it: the harder something is to use, the less likely people are to use it.
Cryptocurrencies aren’t the easiest to use right now, but they are definitely easier to use today than several years ago.
You have wallets like Copay that make it easy to create multi-signature wallets that anyone with a smartphone can download and use, for free. On the more secure route, you have wallets like Ledger and Trezor. They are hardware wallets comparable to the ones that some banks distribute. These make it practically impossible for remote attackers to steal your cryptocurrencies. Of course, if the bad guys are beside you there’s the old technique of hitting you with a wrench until you give the password up. To be fair, this problem exists for fiat currencies as well.
There’s almost no doubt that we will see continued improvements in the usability of cryptocurrencies as we have been seeing.
Fiat x Cryptocurrency
The harder it is to exchange cryptocurrency to and from fiat, the less likely people will do it.
Due to the interest in cryptocurrency as an investment vehicle, there has been an uptick with the number of paths for people to exchange cryptocurrencies. There are new exchanges and more interest in peer-to-peer market places like localbitcoins.com.
We may have more ways to exchange cryptocurrencies, but won’t governments do something about it? Only a few governments seem to be taking a fierce approach to completely banning cryptocurrencies. The rest seem to either know that they will probably be just as successful as banning BitTorrent, or not want to miss out on the innovation surrounding this new technology.
A Topographic Map
Above, I used the word “point” as if it will be the same for everybody. In reality, people have different points at which they will begin moving their wealth to cryptocurrencies.
People are distributed throughout the landscape of peaks and valleys, depending on their personal situation: what their main fiat currency is, how technically knowledgable they are, etc. People move to cryptocurrencies when they hit the blue line. This line goes up and down depending on the assumptions listed above.
We each have points at which we’ll move. The major determinant is where we live, because this dictates what currency we use. The more reasons someone has for moving, the higher they will be on a peak. The more the assumptions I listed above remain true, the lower they would need to be on a peak to have good reasons to move.
Let’s take some real world examples:
- People in Venezuela are on a high peak because their currency is not only very volatile, but very inflationary as well.
- People in Switzerland would likely be in a valley.
- People who have technical knowledge and are in Venezuela are likely to have already made the move.
- When there’s another global economic crisis, there will be some major plate tectonic movement pushing everybody up.
This move to cryptocurrencies is not an all-or-nothing event. Countries of people will make the move before others. Furthermore, they won’t have to move all of their money either — they may move a portion of their savings. If 20% of the world move 20% of their money to this form, would that be enough to inflate the rest of the fiat currencies, even the stable ones, pushing people up peaks in the monetary landscape?
Parting Thoughts
Look Ahead
Many of the criticisms I have seen of this idea were concentrating on the here and now. I urge you to think ahead, as this is what this thesis is about: what lies ahead if trends continue.
Is volatility going down? Can you send more transactions now compared to before? Are cryptocurrencies becoming more accessible? Are they easier to use compared to several years ago? Are they easier to keep safe today than four years ago?
Will Governments Offer Something Better?
Central Bank Coin ;)
It certainly seems like influential heads are not ignoring cryptocurrencies. However, whatever Central Bank Coin is issued will just be like the money we have today — inflationary. I welcome those. Not only will those help solve cash distribution issues to people in far flung areas due to their programmable qualities, their existence will make exchanging to and from deflationary cryptocurrencies easier.
Will Governments Ban It?
I think for any government ban to work, they would need to act in concert. I highly doubt that this will happen seeing how climate change talks are going.
Assuming some ban it and ban it effectively, they will lose the opportunity for their citizens to be a part of this land grab of cryptocurrencies. In the end, they will be holding bags of worthless cash that the rest of the world does not want.
Major Societal Change
With a change of this magnitude, if society is not ready, will likely displace people that move the last, because it will displace a system that we rely on to give relative stability to our lives. If that will be better than today, I do not know — after all, half the world is not part of this financial system we benefit from.
Whether or not using a deflationary currency is better for society as a whole, I don’t think it will make a difference towards this move. Would you expect people to not convert their money to a form that stores its value better because it is beneficial for society?
Ancient Greek Lessons
Aristophanes, reacting to the inflation he was seeing their currency was going through, wrote in Frogs:
The ancient coins are excellent in point of standard; they are assuredly the best of all moneys; they alone are well struck and give a pure ring; everywhere they obtain currency, both in Greece and in strange lands; yet we make no use of them and prefer those bad copper pieces quite recently issued and so wretchedly struck.
If he were alive today, I wonder if he would be typing this on his keyboard instead:
The cryptographic coins are excellent in point of standard; they are assuredly the best of all moneys; they alone are mathematically secure and travel weightlessly; everywhere they obtain currency, both here and in strange lands; it is good we make use of them and avoid those bad paper pieces so wretchedly and carelessly printed.
Further Discussion
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