112 Población y Muestra de Estudio

The flurry of new cryptocurrencies we described above illustrates how intense the competition among these new currencies is. At the same time, an equally interesting and perhaps a more important question is the competition between cryptocurrencies (or a single cryptocurrency that might win the fight discussed above) and state-issued fiat currencies. The tools we developed so far in this book will allow us to analyze this question.

The key issues related to the potential widespread adoption of cryptocurrencies (or one particular cryp-tocurrency) are network effects and overcoming excess inertia that currently benefits state-issued currencies. We discussed both these concepts in the previous chapters.

From this point of view, the plethora of cryptocurrencies may well be a problem. As we saw, individual crypto-currencies have their advantages and likely proponents who would prefer those currencies over other crypto-currencies. While this may well improve the quality of the whole category and lead to further innovations, such splintering of the market limits the network effects that any one cryptocurrency enjoys.

There are two broad reasons why this is detrimental to cryptocurrencies competing with state-issued currencies.

First, and most directly, the more different cryptocurrencies

there are, and the more diverse the preferences of their proponents, the more difficult it is for any one of them to accrue the critical mass of users to position the currency well against state-issued currencies. With fewer potential buyers and sellers, there are lower incentives for everybody else to start using the cryptocurrency. The fixed costs of embracing a new currency can be substantial. The biggest cost may involve adopting the technical infrastructure nec-essary for using the cryptocurrency. For buyers, this may require obtaining a digital wallet for the currency, finding a way to exchange state-issued currencies for the cryptocur-rency, and so on. Sellers would additionally need to find a way to incorporate the cryptocurrency in their accounting systems, price their goods in the units of the cryptocur-rency, possibly allow for the seamless transmission of both crypto- and state-issued currencies between suppliers and other business partners, and so on. Moreover, new users need to learn to use the new cryptocurrency. They may not be interested in the details of how it works, but they need to understand how to use the software that allows them to spend it, how to think about their wallet that now combines various types of currencies, and so on.

These costs increase when there are multiple cryptocur-rencies that may be used in the marketplace. While the cost of acquiring a second or third cryptocurrency, or link-ing them to your digital wallet, are relatively lower than are the costs of the very first one, such costs exists none-theless and make it more difficult to persuade people to use the currency. Users that only opt for one currency are not able to transact with merchants that may not allow this particular one. While there may be intermediaries who will seamlessly translate one cryptocurrency to another for the purposes of a transaction, such a service would require

effort or maybe a fee from the user, which will further increase the costs of using the cryptocurrency.

The second broad issue is that the multiplicity of cryp-tocurrencies creates uncertainty that may delay the devel-opment of that market or stop people from joining it.

For example, users who may potentially be interested in using cryptocurrencies may prefer to wait for the market to tip to one of them before adopting a cryptocurrency and risking that it will fail. An analogy that is useful here is the battle between the two high definition DVD for-mats, HD DVD and Blu-ray, which arguably held up the whole category.²⁵

Of course, the competition between a cryptocurrency and the state-issued currency also depends on the rela-tive attracrela-tiveness of the two—that is, on their efficiency in facilitating transactions and acting as money. We have already discussed how cryptocurrencies’ basic attributes compare with traditional money attributes, along the dimensions considered in Chapter 2. But what matters in the end is whether these attributes make the currency suf-ff ficiently desirable for a sufficiently large group of people.

That means that the new currency must be significantly better than the existing alternatives for some particular purpose.

Cryptocurrencies have some advantages over state-issued money. The most obvious are the ones exposed in Satoshi Nakamoto’s paper that gave rise to Bitcoin: the ability to make online payments in a cheap way, allowing for micropayments because of its divisibility, and giving users a measure of anonymity. Some of these attributes can have both positive and negative impact. For example, ano-nymity may be viewed as a benefit over credit and ATM cards. It protects your privacy and may help you avoid

fraud: you’re not sending your card number, your address, or even your name to a merchant who might turn out to be dishonest. This may be particularly relevant when you transact with sellers in other countries, perhaps ones that do not provide you with the same protection as your home country. In those cases, you might decide not to transact if you had only a credit card at your disposal, but you may be more inclined to use cryptocurrencies to trade. Ano-nymity may also be important for dissidents in authoritar-ian regimes or, for example, for women in countries like Afghanistan, where they are legally not allowed to have a separate bank account. On the other hand, anonymity may also stimulate nefarious uses, as in the example of Silk Road discussed earlier.

There are other attributes of cryptocurrencies that are sometimes mentioned as advantages over cash but that are not as clear as the ones above. For example, it has been often pointed out that Bitcoin transactions are quicker and cheaper. But this description may be misleading. Bitcoin transactions typically take about 10 minutes to an hour to verify and settle, as a block is added every 10 minutes. More-over, the transactions may require a fee of a small fraction of a bitcoin; otherwise, the verification of transaction may take longer. So whether it is quicker and cheaper depends on what do we compare it with. Its attributes make Bitcoin quicker and cheaper for merchants than credit cards are,²⁶ but this is not necessarily so for the customers.²⁷ And it is difficult to argue to what extent Bitcoin transactions are quicker than are cash transactions. Cash transactions are settled the moment the cash is handed over. It is hard to imagine someone rummaging through his or her wallet for longer than 10 minutes. It is possible, though, that Bitcoin transactions are cheaper than cash transactions are if one

accounts the cost of going to the bank with cash to deposit it and the risk that it may be stolen on the way.

Overall, Bitcoin and other cryptocurrencies offer a num-ber of novel and attractive attributes. The big question, however, is whether people would care enough to switch.

Even if they do, the question then is whether enough peo-ple would care to create a critical mass of adopters to make it a viable currency.

4

C h a p t e r 5