How do we value currency? How do we know a single dollar bill is really worth that? The answer is quite simple, because the government says so. One dollar is worth one dollar only as long as the government is willing, and able to defend its value, but before it gets to the point when the government needs to step in to defend its currency, people expect the government will defend their currency no matter what, so a minimum value of one dollar is formed for a single dollar bill!
Now, let’s think about the opposite situation. What happens if people regard a one dollar bill to be of more value than just a buck? The answer is still the same, it is only worth one dollar. Why? Again the same answer — because the government says so. However, there is a slight difference — the government is able to back up its claim simply by printing more currency. If demand for currency rises, what the government (or the central bank to be exact) needs to do is supply more currency. That is why in a growing economy there will always be some moderate inflation.
The value of a currency is decided by the size of the economy (apart from the US dollar which functions as a base currency for other currencies) and the amount in circulation is controlled by the central bank in order to ensure stable growth. If too much currency is supplied, a more than desired inflation rate may hurt the economy, and if currency is not supplied enough, sluggish growth will hurt sentiment.
Basically, currency value fluctuates relative to the size of the economy, and the supply and demand of currency is dependent on which direction the economy is taking. A clear example of this is the foreign exchange market. Exchange rates fluctuate every second because market participants expect a different value for currency A relative to another currency B.
For example, the GDP of South Korea for the year 2016 is equivalent to 1.411 trillion USD, and if the South Korean economy is expected to grow relative to the US economy, KRW will appreciate relative to USD, given the supply of KRW stays the same.
Then how do cryptocurrencies fit in to all this? Cryptocurrencies are universal, borderless, not controlled by a certain entity and acceptable anywhere. This means cryptocurrencies are not tied to a local economy and thus, it is only plausible to think of cryptocurrencies on a global scale. The issuance schedule for cryptocurrencies and its hard cap allow its circulation and total supply limited to a certain number. Combining such factors of having a limited number of currencies in supply in relation to a single global economy means there simply aren’t enough cryptocurrencies to “cover and match” the global economy. There is no central bank to supply more crypto. Since the supply of cryptocurrencies is limited, the only logical progression is for the value of cryptocurrencies to go up. Some might think the rise in the number of ICOs may provide increased supply. This is only true to a limited extent as a lot of cryptocurrencies launched have a domain specific use rather than a general use, and which is also why cryptocurrencies such as Bitcoin and Ethereum, considered as base currencies in crypto world have a higher market cap.
Since the value will rise and people expect it to continue rising, people will be inclined to keep rather than spend. Although originally designed as a currency, this aspect highlights the asset side of crypto and will continue to be considered as an asset until people are convinced that the value of crypto will not rise significantly more than the global inflation rate. So, until the market cap of cryptocurrencies reach a certain percentage of the global GDP, it is quite likely that cryptocurrencies will continue to rise in value and thus considered more like an asset. The Chicago Mercantile Exchange planning to launch Bitcoin futures, and the Accounting Standards Board of Japan to guide cryptocurrencies to be recorded in the asset side of the balance sheet is reflecting such trend. (Currency, or cash, is also booked in the asset side, and currencies also have futures for trading but this is because they are an asset!)
Mind you, the total market cap of cryptocurrencies is only approximately 350 billion USD as of recent, and this figure is just a fraction of the global GDP and not even comparable to the total global wealth. Bitcoin’s market cap is only a fraction of that of gold, so you could say crypto is still a relatively small market despite the hype and frenzy (https://www.fool.com/investing/2017/08/17/how-does-bitcoins-market-cap-stack-up-next-to-gold.aspx). To me, it seems it is just the beginning.
Then by how much and to be more specific, which out of the 2,000+ cryptocurrencies will rise? Who knows. Unfortunately there is no clear cut answer to how much of the global economy will be ready for cryptocurrencies. There will be parts of the world where using fiat is preferred to using crypto, or the usage of crypto is banned altogether. It is quite unlikely that crypto will replace fiat and efforts to provide a reasonable projection based on past data is useless at this point as there just isn’t enough of any.
As already mentioned, it is just the beginning and so it’s hard to tell which project will prevail. Some compare the rise of blockchain to the rise of internet in the 1990s. People claim that like Yahoo or Lycos, most projects will be wiped out after the first burst of the bubble. However, giants such as Google or Facebook emerged after the burst. Many crypto projects have raised enough money for them to last several years. We’d have to wait and see how this goes.
Nonetheless, there are a few factors that are necessary for a cryptocurrency to be successful — low latency, universality, enhanced privacy, and a decentralized governance system. I would dwell into all of the such qualities in more detail but that’s an extensive topic of its own.
Bitcoin, though being the first blockchain and thus best known, has limited functionality — all you can do is remittance. It is also slow and does not have a governance system hence the endless split in the chain, first Bitcoin Cash, then Gold, then Diamond, then who knows what. This may be a threat to the potential value of Bitcoin as a single chain.
Ethereum strives to offer more functionality, but it is still slow and does not offer safety for their smart contracts. The dependency for the charismatic founder, Vitalik Buterin, is a bit too great as we have witnessed with the split of Ethereum Classic. There is still lots of room for improvement for Ethereum, but also lots of complexities that need to be addressed.
BOScoin aims to achieve all four by creating a platform based on a consensus algorithm called mFBA, Trust Contracts which are easy and approachable even if you don’t know how to code as well as being decidable, and a governance feature called the Congress Network. Compared to other consensus algorithms, mFBA provides a fast and stable network with little downside. It aims to provide a transaction speed of 1,000x per second and more nodes will provide more stability to the network. Despite being possibly the fastest consensus algorithm there is, depending on the number of nodes, DPOS offers a structure where economic incentives and thus political influence will be concentrated only to the few. This goes against the principle of blockchain, and it is the belief of the BOScoin team that despite its merits for low latency, DPOS does not offer a truly decentralized and democratic governance system.
There will be dips in the markets to adjust the rate of growth and skeptics who dismiss it as a bubble, even compare it to tulip mania. Some call it the “cryptocurrency craze” as Bitcoin has gone beyond $10,000. My opinion is, it hasn’t even started.
