Bitcoin, the Gold Standard, and Crypto Theory

Two Theories Regarding Cryptocurreny

Cryptocurrency can be separated into two schools of thought.
The first places Bitcoin as sort of a holder of value, a gold standard so to speak. And the second believes that a division between the two needs to be made between Bitcoin and every other crypto on the market.

Nobody doubts the fact that volatility in Bitcoin results in magnified volatility in the rest of the market. If Bitcoin has an amazing week and goes up 50% then many other complementary coins will go up in the range of 40 to 60% as well. The inverse, drops in Bitcoin, has a similar affect in bringing down the market. So it would make sense to say that the market is highly dependent on the movements of Bitcoin and Bitcoin itself is the variable that most affects market health. For this reason, many people believe that Bitcoin is the holder of value for the cryptocurrency market as a whole. Meaning that Bitcoin is the ultimate currency, a sort of worldwide safety to back up all the other cryptocurrencies. But, for all its glory, it still is considered by some to be behind on technology and real world application. You will hear over and over again naysayers saying that bitcoin is, “slow, expensive, and dated.” And while this is partially true, it does not diminish the fact that Bitcoin will have the biggest impact of any cryptocurrency, probably ever.

So what if Bitcoin was this gold standard for all crypto-markets? Yes it would still go up and down in valuation. And yes, it would react sharply to poor news and positively to good news. However these sorts of dips and rises would reduce in volatility over time as adoption becomes more widespread. Think about it, the more people buy and sell gold, the more confidence people have that it will be worth a comparable amount in the next 2-3 years. If the market for gold crumbles and there is no real use for it then faith in gold is diminished and it will not be valued as highly. After all, gold is a shiny mineral that people found real world uses for and assigned a valuation on it based by demand. If somehow the mindset that gold was worth something was reversed then there would be no value. Nobody pays $1,000s of dollars an ounce for dirt, but if there was only 20 lbs of dirt on the Earth, what would it be worth? Now replace gold with Bitcoin and imagine it had widespread applications, a fixed amount, and is worth a pretty penny then demand would skyrocket while supply would remain unchanged (and actually decrease in Bitcoin’s case).

Bitcoin as a gold standard is the original idea when it comes to cryptocurrency valuations and future speculation on crypto-markets. However, many people feel that this is a dated school of thought. The second school is the counterpoint to Bitcoin as the gold standard. And that is that Bitcoin is essentially useless as a currency in the immediate future of the crypto-markets, but acts as a great catalyst for bringing people into the cryptocurrency markets. These people often site better technology, faster transaction times, more transparency, and limitless real world use cases as the reasoning behind alternative cryptocurrencies. They often say that people just need to see how really cumbersome Bitcoin is to utilize to see that it is not the future. Let us take photography for example. People who view it from a non-gold standard viewpoint see Bitcoin as the Kodak of the cryptocurrency world. It opened our eyes to a whole new realm of technology, culture, jobs, and ideas, but in the end advancements in techs made it nearly obsolete.

People who believe Bitcoin is a not a gold-standard for crypto point towards a variety of factors limiting widespread adoption as the reason. One of the main ones is fiat to crypto pairings. It is no secret that most exchanges will only let you exchange your fiat (think USD, KRW, GBP) for a select number of cryptos (mainly Bitcoin, Bitcoin Cash, Ethereum, and Litecoin). This puts up a massive barrier to entry and induces more volatility. If you can only buy in with a select few then you can only cash out with a select few. Get where this is going? For example, if everyone sees bitcoin dropping then there will be a sort of bank run (or value/crypto run/crash). And how do you get your money out if you are seeing large decreases in bitcoin? Well you put it in to Bitcoin and then sell it into your respective fiat before the market goes down further. See how people could then interpret Bitcoin as being a standard for the whole market, and see how limiting what you can cash out in can cause a sort of bank run? Luckily, this newer school of thought believes there is a way to reduce this. And that is by introducing a number of things that reduce widespread barriers to entry. One would be to introduce more fiat to crypto pairings. If people had the option of pulling out on forty fronts, as opposed to only three or four, then drops would not be as magnified as runners would have more currencies to pull out from. This, among many other things could theoretically reduce Bitcoin’s dominance.

You may ask yourself, “wouldn’t that just mean more money could be pulled out simultaneously?” Let us take a look at Ethereum, another major fiat to crypto pairing. Overtime, as it has grown it has become less dependent on the movements of Bitcoin. Still, a 20% drop in bitcoin leads to a sharp decrease in Ethereum, but these drastic complementary movements are starting to diminish. A 5% decrease in Ethereum usually was a clear sign that Bitcoin was dropping 4-5%. Nowadays it is not uncommon to see a 5% decrease in bitcoin while Ethereum is simultaneously going up .5%. The market is starting to separate itself from Bitcoin. Now imagine if this same result could be achieved with 40 more easily accessible fiat-crypto pairings. It would have the net effect of reducing volatility, as less people would be dependent on the actions of Bitcoin to pull out money. Fear in one sector would not snowball as much and these drastic 10 to 15% drops and raises would become far less common. So yes, for some time we will see the market follow Bitcoin, but slowly but surely the divide will increase.

Another promising sign that the market is separating itself from Bitcoin is the fact that real world application is being found in alternative cryptos. These cryptos are starting to hold their own value and act as a sort of valuation (or lets say stock) on that particular company. They are not necessarily being used in a currency sense, but more of a common stock or even preferred stock (in the case of nodes that pay dividends). This is what another large group of people believe this market will eventually come to. And that is sort of a blend between the modern day stock market and a transferable currency. Something that can simultaneously be used as a currency and as an investment opportunity. It is like having an extremely accessible New York Stock Exchange, the people’s stock market, that is more liquefiable that many other investments.

What is necessary to reduce volatility in the market is an understanding by governments and traders about what is permitted and not permitted in this sphere. How to go about offerings, screening techniques, what oversight is necessary. Confidence by the people will bring more money. While the original goal was to be separate from banking institutions and governments, it is unfortunately likely that this will not happen. For many people to actually utilize these technologies and currencies there will need to be some sort of framework to guide these investments. How is it that companies are allowed to forbid customers from spending their own money and canceling their transactions for the purchase of cryptocurrencies? Once things like this are broken and major governments come out with statements condoning or disallowing certain practices the space will truly flourish. Many people do not want to start businesses on the blockchain if they fear the trading of their valuations will be eliminated by their host country or many countries abroad. A global stock market seems to be in the works, and regulation will likely be necessary to see true global growth. Unregulated markets are not sustainable, and manipulation can’t run rampant if we are to see true global investments and growth.

This is not to say that Bitcoin will go down or up in the future. This is just to say that market separation is likely necessary for success of the market as a whole. Maybe Bitcoin is just a catalyst, or maybe it is the gold standard. That is for the future to tell.