When the cryptocurrency markets are as volatile as they are now, it helps to remember that these coins are just kids. Until they grow up, they are going to be very unpredictable. Their prices won't become stable until they reach their full market potential, which, in the case of the global currencies, is measured in the trillions of dollars.
So it's a good time to think creatively about how they might grow. Bank partnerships and marketing are the obvious suggestions. Below are three strategies that are more on the fringe, but each is either happening now or is likely to happen over the next couple of years.
Portable Currencies: One way to grow is to expand your customer base. But not everyone in the world wants the same thing in a currency. So how does a currency designer choose among the many characteristics that matter in the market - anonymity, speed, transaction costs, governance, decentralization, supply, utility, etc? What if a single currency could be developed that allows the user to select among various form factors, while maintaining the value of the currency. This is the idea of Portability.
New currencies are being designed that allow for free transfer among blockchains or centralized record keeping systems with unlimited local features. For example, if the currency is XYZ, a user could hold her XYZ on a Monero-like blockchain if she wanted a high level of anonymity, or a DASH-like blockchain if she wanted to exercise a vote to create new features, or a centralized record if she wanted free transfers, or a localized merchant sponsored blockchain for special deals, or a government sponsored blockchain for favorable loan terms. This would all be done with guaranteed 1:1 transfer between blockchains and in each case XYZ would be the currency that is used with merchants.
Metronome, which is launching in late February or early March, is introducing one form of portability. Provide, a company that is affiliated with the Currency Report, is also in the early stages of developing a comprehensive form of a portable currency.
M&A: Consolidation is another way to gain economies of scale. This could be especially helpful for the network effects of currencies. Can decentralized currencies merge or can one decentralized currency acquire another? Sure. The currencies are decentralized, but they all have governance structures that could vote for an M&A transaction. Some governance structures are more formal and well-functioning, such as that of the DASH master node system in which large holders actually vote on proposals. Others are a matter of practical reality and are less predictable, such as Bitcoin's reliance on miner adoption. Nevertheless, all coins are potential buyers and sellers in M&A transactions.
In fact, according to recent tweets by their principals, Litecoin and Monero are thinking about merging. So should the Bitcoin community hire Goldman as an M&A advisor? Could DASH one day go on a buying spree with its treasury funds? What about one of these new coins that are raising billions of dollars?
It may be a little early for a roll up among the currencies. The competitive landscape is probably still too fluid for the constituents in each of the coins to come to agreement as to a fair price. But in a couple of years, when the competitive landscape becomes more clear, consolidation could be the theme. Investment banks should be preparing for this.
Note that M&A transactions may not always result in one currency disappearing. They could be done as consolidations into a federation of portable coins with a new common currency.
Governments are the elephants in the global currency room. Government sponsorship would mean instant adoption by a large group of people. There is talk of governments putting their national currency on a blockchain, but that's not such a big deal. They would still control the supply. The big deal will be when a government sponsors a decentralized currency. Imagine Canada creates a currency called Maple (MPL). MPL is completely decentralized - Canada has no special control. They make the currency legal tender in Canada and support their banks in the creation of MPL denominated demand deposits with Visa and MasterCard integration. MPL would have a big competitive advantage in gaining traction as a global currency.
Why would Canada do this? Because they could make a lot of money. If they kept 10% of the issuance for themselves (seigniorage), and waited to sell their stake over time as the currency grew into a truly global currency used around the world, Canada would make $100 billion for each $1 trillion of value created. Considering the global M2 money supply is about $86 trillion, this may be worth considering for any country.
Maybe Canada won't do this, but there are a lot of smaller countries that might. Or a number of countries might partner, for example, Canada may partner with South Africa, South Korea, Brazil, India, Mexico and a non-Euro European country. Not a bad group to kick off global network effects.
First movers have a large advantage with government sponsorship. This creates a big risk for the other countries if they stall or try to prevent this from happening. If the U.S., China and the Euro Area wait, they could be displaced by a currency issued by the other countries. Maybe all of the nations of the world will do the improbable and agree to jointly create a decentralized global currency? Maybe the market will force political integration? This seems unlikely. We'll see.
The roadmap for the decentralized global currencies is complex. It involves technology, marketing, competitive strategy, financial engineering and politics. The variations of potential outcomes are endless. One thing is for sure - price volatility will not slow down until the market is mature.
About The Currency Report: The Currency Report promotes the adoption of a decentralized global currency. We provide advisory services to new currency designers and investors, including our fund, the Global Currency Fund. Read the Guide to New Currency Valuation and Design, sign up for our blogs or, for accredited investors, inquire about our fund. For more information contact Shane Hadden at email@example.com.