So you’ve created a new digital currency!
It has a cool logo, an interesting name, and a small but growing horde of fiercely devoted fans forming a community around it on Reddit. More miners are coming on board every day, churning out new coins and securing the blockchain as the network hash rate rises steadily. Your coin has a feature that other coins don’t, something that makes it more than just another Bitcoin (or Litecoin) clone. You have worked hard to get it onto a major exchange, and now speculative investors are even beginning to buy quantities of the coin. Volunteers are helping you market the coin, creating nifty artwork, and persuading merchants to accept it as a form of payment. Things are looking great! To the moon!
The only problem is, after a couple of months, the price isn’t really moving anywhere. The difficulty has risen, so miners are getting fewer coins per day, and the initial onslaught of investors willing to purchase the coin at a premium are drying up. A few people start to complain about the lack of price movement on Bitcointalk and in IRC. People look to the developers and ask them what they are doing about it. Some start to gripe about how much of the coin was pre-mined and start slinging accusations that the developers have dumped their coins. The developers swear they are working hard to promote the coin, and that big things are coming, just around the corner! Panic sales start creeping in, and the price drops further still. All in all, this happy little coin community has fallen into despair rather quickly.
But what went wrong? What are they missing? Is it that they didn’t get listed on enough exchanges? Maybe if they could just get onto Cryptsy, then they could see a nice big value surge! Nope. The problem has nothing to do with reaching more buyers. Could it be that perhaps they just need a few more merchants to accept the coin as payment for goods and services? No, that’s not it either.
This coin community is far from alone. The problem, in fact, has little to do with this particular coin, and much to do with simple economics. The problem, in a nutshell, is that something like 99.99% of all trading volume is only occurring between two parties: miners and investors. Yup, that’s it.
In the old days, that was enough – at least in the beginning. For one thing, there was only one digital currency – Bitcoin – and many believed that early adopters might make a fortune by investing in it. Indeed, some did. When Litecoin came out, it didn’t take long for investors to jump on board again. However, nowadays there are just too many new cryptos competing for investors’ attention for them to stay focused on any one coin for long. Scandals and thefts like the Silk Road and Mt. Gox incidents have lowered the general public’s trust in cryptocurrency, driving away many casual would-be investors. Now we need to focus on getting regular people, who are not only interested in making a quick profit, to begin using cryptocurrencies.
Suppose I want to acquire a laptop. Or an Espresso, it makes no difference. I can exchange cash, those funny paper bills the government prints and guarantees, to ‘trade’ for the item I want. Well, where did I get those pieces of paper with Ben Franklin’s portrait stamped proudly in the middle of them, to begin with? Most likely I obtained them from my job. My boss ‘trades’ me a salary in exchange for my time and the use of my skills. In reality, my boss doesn’t hand me cash, it goes straight into my bank account, but the point here is that I am paid in U.S. Dollars. And, whether I obtained my funds as a result of going to work, selling my old phone on Craigslist, or shoveling my neighbor’s driveway, it’s very likely that I received payment in terms of whatever local currency is used in the country I reside in.
So why would I bother to go through the hassle of converting my fiat currency (cash) into Bitcoin (or any cryptocurrency) just to buy something? It’s complicated, and there are risks and fees involved. Besides, some businesses charge a higher price when a customer pays with crypto. I can just pay with cash directly, or use a credit card and then electronically pay the balance off from my bank account later. “But, bitcoin is so cool!” you say. “You have to try it, it’s amazing! …Okay actually it’s really confusing at first and if you do anything wrong you could lose all your money. If you aren’t careful, your hard drive could crash or hackers could steal all your coins. But you gotta try it!” Assuming I am just a regular Joe Normal Guy (or Girl,) this is the part where I tell you thanks but no thanks (and mutter something about how this whole thing sounds like a scam, much to your frustration. If I happen to mention the word “Tulips” you might just kill me where I stand!)