Game of Coins

Crypto coins are not commodities, but what does it mean?

The Austrian school of economics defines money, by word of Carl Menger (the founder), as: money is the most desired commodity. This must be true as a commodity that is not the most desired commodity might be rejected by those who prefer a different commodity as a medium of exchange, meaning some transactions will take place in that different commodity and an additional exchange will be required to complete the transaction back into your personal commodity favourite. Which means additional effort, time and thus costs. Therefore, to exclude these discomforts, there is a tendency towards one commodity being used as money and that will be the one that you can always exchange, that everybody likes, the most desired commodity. Ergo: there can be only one money.

Another aspect of commodity money is its limited supply. There will be no credit creation via fractional reserve banking or outright money printing by a central bank. As a result a commodity money will be deflationary, meaning the supply of money will always be limited causing the commodity to remain valuable, and, with economic growth, even to increase in value.

Following the above principles, Satoshi Nakamoto designed bitcoin as a deflationary coin, as digital gold.

While bitcoin may be designed to mimic a commodity. It certainly is not a commodity. Bitcoin has a finite supply, gold has not. The supply of bitcoin follows mathematical rules. The supply of gold follows price. With rising prices (meaning gold has become more scarce, or demand has outpaced supply), more gold will be mined from more difficult sources, simply because this has now become a profitable affair; consequently, gold can better balance demand with supply and thus creates less volatile price patterns. In addition, while only a handful of commodities qualify as money, there is no limit to the amount of crypto coins that can be created. If bitcoin is digital gold and litecoin is digital silver, then, what are all the others?

Despite the fact that some coins are specifically designed for specific monetary uses and others more as network fuel, all crypto tokens are a necessary part of that network, of their corresponding blockchain. Without a token there is no decentralized verification of transactions. We now have multiple blockchains for publishing and social media, for platforms to create apps, for prediction markets, for human resource activities, for Internet Of Things transactions, blockchains to facilitate communication between fiat and crypto, decentralized platforms for supply chain management are being built; with an endless amount of specialized blockchains to come, each with their own dedicated token.

Competition is good. We must applaud it. But, if and as these specialized blockchains become successful, as some already are and as many can be expected to follow, then their tokens will have value. What will happen to the deflationary principle, originally intended as a core feature for bitcoin and other crypto coins, and the principle that eventually only one coin can be considered money?

These principles will no longer hold.

There will not be one money that has outcompeted all the others, standing proud and tired on a mountain of blood and bones as the winner of this monetary cock fight. There will be many monies, each specialized and in constant competition with similarly specialized coins.

The co-existence of many crypto coins does pose questions regarding their interchangeability as they will need to be exchanged quickly and cheaply. With increased usage this promises to be a fairly easy process from the technical side. However, the cumulative costs of permanently exchanging coins might be less inexpensive then desired.

Another thing is the absence of a unit of account. In what coin will goods and services be priced in order to have an understanding of the actual costs vis-à-vis other goods and services? I don't know if anybody actually calculates prices in milli bitcoins, ethers or any one of the other coins, but if you do, I guess you're a minority. Fiat is still the unit of account and will most likely remain so for some time to come. We must realize that fiat currencies are still a part of the Game of Coins and they may even make a comeback.

Regarding the expectation of a deflationary monetary system with increased usage of crypto coins and the degree to which this will manifest itself, all depends on the amount of coins used to price goods and services. Assuming demand stays equal, or is dependent on external factors, it is supply that determines the value of the monetary unit, or in this case monetary units. The greater the total amount of coins, the less deflation.

As said before, all coins are network coins, but to what extent will there be a need for specialized monetary coins when f.i. ether has substantial value itself? It's possible to imagine a situation where f.i. bitcoin, litecoin, dash, monero & zcash are the dominant monetary units pricing almost all goods and services next to thousands of coins fueling specialized networks. But it's equally possible to imagine that these specialized network coins make the monetary coins obsolete as the specialized coins have sufficient monetary value themselves provided they can deliver a comparable transaction security. And, of course, just about every variation in between the above two extremes can be imagined.

If the specialized network coins make the monetary coins obsolete, at least to some extent, actual goods and services will be priced in thousands of monetary units with a near infinite supply as more specialized network coins will continuously be added to the decentralized economy. Will we still enjoy a deflationary monetary system (probably not), or have we perhaps become even worse off then we are now?

This question cannot be answered as the outcome depends on the ongoing and ever changing preferences and choices made by millions, if not billions of users that are simply impossible to predict.

What we can say, after this little mental exercise, and with considerable confidence, is that the scenario of one coin winning the Game of Coins, a coin with a built-in deflationary monetary policy, as originally intended, and consequently with a price catapulted to heights unimaginable, seems an unlikely outcome.

What also has become clear is that in the crypto coin revolution there are still many bear traps ahead of us, despite the glowing successes so far.