Store of value vs Transactional Currency

(Bitcoin appears to be moving towards becoming a store of value rather than mass transactional currency. Whilst this is understandable and possibly even desirable, it clarifies the picture for GAME and other sector-specific currencies.)

Bitcoin was something completely new when it was first suggested back in 2008. A peer-to-peer electronic currency was something that many experts thought was impossible. It launched just eight years ago. Over that time its ecosystem has evolved, and so has our understanding of how it may come to be used – and with that, the role of various alts.

Bitcoin’s emerging role is as a store of value, one of three key purposes of money – the other two being a unit of account and a medium of transfer. Two or three years ago, the situation was somewhat different: bitcoin was widely expected to be used as an everyday transactional currency, due to its advantages for sending money securely, at low cost and borderlessly. That picture has now changed.

The reason is partly down to the slow speed of development for bitcoin. SegWit would increase transaction capacity, but it is unclear whether it will be activated – let alone subsequent changes that will further increase block size. As it stands, bitcoin is all but maxed out. To guarantee a transaction is included in a block when the network is faced with more than peak capacity, it will be necessary to pay a higher fee. From there, it’s just maths to recognise that bitcoin will become a low(er) transaction but higher-value cryptocurrency. It does not have the transaction throughput to make it usable as an everyday currency. It is more like digital gold.

Even if block size increases were accepted – which is quite possible in time – this would still not be enough to support the millions of transactions that take place every hour in the global economy. A more likely model of crypto adoption will see many different altcoins being used, with bitcoin being a bridge or currency of settlement between them. It will make sense for one or more coins to be used in each different sector, with one likely becoming pre-eminent: one or perhaps several for rewards, according to sector and geographical location; one or more for social networking, tipping and so on; stable coins for remittance; separate ledgers and currencies for commodities – the list is endless. High transaction volumes are built into the business model for gamecredits from the start, so it has a good head start to becoming the transactional currency of choice for the gaming industry. All being well, this will naturally bring substantial increases in value, but it sets it apart from the status of bitcoin as a low-transaction store of value, possibly an order-of-magnitude or more larger than its current market cap itself.

It is simply impossible for one blockchain to support the weight of daily transactions in even a fraction of the global economy. Economist Friedrich Hayek anticipated a market of many competing currencies, with the ones that gave the most utility to users becoming most popular. Whilst we are still at a very early point in the history of cryptocurrency, that is the situation we appear to be slowly moving towards – of a plurality of different forms of decentralised electronic money, each primarily suited to their own sectors and applications, albeit with value outside of them. Money is, after all, money, and can be exchanged and traded whatever form it takes.