The following article is an exclusive contribution to CoinDesk’s 2017 in Review.
Nothing lasts forever – we sleep in a world that’s subject to the immutable law of change.
However, it’s also true that human minds have a preference for the present state of affairs (status quo bias) and have difficulty conceptualizing dramatic changes from what they know and are conversant in .
Money may be a case in point. The form, nature and name of cash have changed over time. we’ve used cows, animal hides, beads, shells, salt, gold, paper and more as our stores useful , means of exchange and units of account. Much has been written about the key characteristics of cash (divisibility, durability, fungibility, portability and scarcity) that determine its acceptability in society and the way , over time, communities adopt the foremost frictionless sorts of money that best embody these attributes.
Yet, despite this rich monetary history, we’ve a bent to believe that our current sort of money, fiat currency, is somehow immortal, albeit it’s only existed in its current state (unbacked by gold) for just over 46 years – half a person’s lifetime.
This past year, despite the promise that cryptocurrency will become the foremost technologically advanced sort of money humanity has ever known, many have criticized the volatility of cryptocurrencies as a symbol of their demise. the reality is that this asset class wouldn’t be what it claims to be without this volatility.
It is a necessary ingredient for monetary transition.
Defending the new
Money is most volatile at two stages of its lifecycle: its birth and its death.
We are well conversant in the volatility that takes place at the death of a specific sort of money. The Venezuelan bolivar and therefore the Zimbabwean dollar are two of the foremost recent examples.
The birth of a totally independent sort of money is simply as turbulent. Our traditional valuation methodologies of discounted cash flows, comparable analysis or precedent transactions fail us as cryptocurrencies haven’t any cash flows to discount, no comparable ratios to multiply and no precedents in history.
We’re left with the brute forces of market dynamics to get the relative value that humans place on this new asset: people express the worth they place on cryptocurrencies by the quantity of another asset (e.g., U.S. dollars) they’re willing to sacrifice. But opinions on cryptocurrencies vary drastically and these divergences cause expressions of sacrifice that are even as divergent, resulting in tremendous volatility.
Money always must prove itself as a store useful before it becomes a medium of exchange, including a unit of account (why would someone ever accept money in exchange for energy-consuming goods and services if the cash didn’t possess and hold value?). Volatility is an inescapable path toward this proof of a replacement sort of money.
But while the longer term remains unknown, the trail towards acceptance and adoption of a replacement sort of money won’t be simple.
The plethora of cryptocurrencies alive today may only be a stepping stone to a universally accepted sort of money. Yet, the volatility inherent in establishing a replacement international currency heralds the volatility that society will got to undergo so as to determine a replacement global system that better serves the requirements of humanity.
The unity of the family, tribe, city-state and nation are attempted and established. World unity is that the next goal towards which a harassed humanity is striving. True monetary union can’t be accomplished without political and monetary union.
The following words from “Who’s Writing the Future?,” written by the Baha’i International Community in 1999, well before the arrival of cryptocurrencies, resonate as I ponder our future:
“It would be difficult to exaggerate the psychological and social impact of the anticipated replacement of the jumble of existing monetary systems – for several , the last word fortress of nationalist pride – by one world currency operating largely through electronic impulses.”
Still think volatility may be a problem? CoinDesk is accepting submissions to our 2017 in Review. Email firstname.lastname@example.org to share your thoughts and make your argument heard.