Cryptocurrencies and Exchange Rate Volatility: Recommended Reading

A lot of people ask us about exchange rate stability and how it would affect the usability of Kin. In fact, Ted was asked that question (in different forms) three separate times in his most recent Q&A session.

Note: Click here to see the AMA, then check out questions and answers at 5:33, 9:02 and 28:57.

As Ted says, we’re pretty confident that when the Kin economy matures, exchange rates will not be such big of a problem. Cryptocurrencies today are notorious for their volatility, but admittedly almost all trades are by speculators and nearly none are for real use of the currency.

In a mature ecosystem in which speculation is marginal and most use of the currency is for goods and services, the exchange rates will naturally stabilize.

This statement may seem simplistic, but it’s far more than intuition. The assessment is also backed by economic models.

“More widespread use of virtual currencies by merchants and consumers lowers the impact of speculative behaviour and therefore stabilizes the exchange rate.”

The above quote comes from an excellent paper called On the Value of Virtual Currencies, which was written by Wilko Bolt and Maarten R.C. van Oordt for the Bank of Canada.

The authors apply the classical economic models for the value of currencies to crypto. Their theoretical framework shows that three components are important for the exchange rate:

• “First, the current use of virtual currency to make actual payments.
• Second, the decision of forward-looking investors to buy virtual currency (thereby effectively regulating its supply).
• Third, the elements that jointly drive future consumer adoption and merchant acceptance of virtual currency.”

We designed Kin’s economics to eventually support all three components. And we keep each of them in mind as we seed our partner ecosystem and refine the framework for the Kin Rewards Engine.

I highly recommend Bolt and van Oordt’s paper to readers interested in learning more about exchange rate stability. (The models they develop can be a bit technical and hard to read — unless you’re accustomed to reading economic literature — but their general explanations are very accessible, and deliver their insights in plain English.)

Check it out below — especially the insights on how network effects facilitated by two-sided marketplaces may play an important role in the adoption of a virtual currency.

Literature on the economics of virtual currencies is still developing, but Kin is learning from the best as we build a fairer digital economy for all.