(Continued from "The price and value of cryptocurrency: (3) Risks of cryptocurrency". This is the last of the series.)

Cryptocurrency has various risks. How can cryptocurrency overcome the risks and get a foothold in the real life? This post, the last of a series, tries to answer the question. It will suggest a few key tasks for cryptocurrency to survive. And I would like to share my view on whether cryptocurrency can survive ultimately.

Strategy for cryptocurrency

Strategy 1: Focus on actual use

As I explained earlier about the valuation of cryptocurrency, the most important variable that determines the market price of cryptocurrency is the size of the economy in which cryptocurrency is used.

Currently the total market capitalization of all cryptocurrencies is very high compared to the size of the market that uses them. People who buy cryptocurrencies are expecting they will be used a lot in the future and prices will rise. It is like a company has a high valuation albeit making no profit because people believe it will do well in the future.

But that is not the mainstream view. Government officials in various countries are comparing cryptocurrency to Dutch Tulip Mania. If cryptocurrency keeps showing high price and insignificant use, they can introduce fatal regulations before they are used in a meaningful way.

Therefore adoption, or increasing economic activities using cryptocurrency, is the most important task now. So far the interest in cryptocurrencies was mostly around building businesses using cryptocurrency or blockchain, or investment in them. Now is the time to turn our attention to adoption and use.

Many people think that if we create a good technology market will recognize and use it. Market tends to move like that, but not always. It is hard to argue that Windows dominated the market because it had superior technology to Macintoshi. The QWERTY keyboard became the standard for all criticism about its suboptimality.

I am not arguing for stopping technological improvement and focusing on marketing. It is rather making adoption the goal even for technology development. It is making technology for immediate use the priority rather than developing a fantastic feature for a future use case.

Adoption is not the sole responsibility of cryptocurrency developers. Business people should accept cryptocurrency payment. You can accept your favorite cryptocurrency or multiple cryptocurrencies. And you should show the sign visibly. "We accept cryptocurrency."

Bjork, a female singer, sold her album for cryptocurrency on her website. We are still in a time in which just using cryptocurrency can be a news. Businesses can take advantage of this, to promote the business as well as the cryptocurrency.

Consumers also have a task. Use cryptocurrency.

You may have been looking at cryptocurrency as your precious asset, but that perspective, if excessive, could be harmful to the future of cryptocurrency. It may sound paradoxical but spending some is the way to help your cryptocurrency's price to rise.

Focus on non-core markets of fiat currency

To increase adoption, you need to focus on the market you can serve best. What is such a market? When you have a strong incumbent, an innovator with limited resources need to think about two broad things.

• The market that the incumbent does not serve well (but we can)
• The market that the incumbent does not find attractive (but we do)

The first can be called capability, and the second motivation. We need to find a market in which we have advantage in capability and motivation. In other words, we should focus on the non-core market of national currency.

Target market candidate - Remittance

The first candidate is remittance. In 2016 the amount of remittance was 575 billion USD, and it is said to be 35 - 75% larger if you add informal channels. Formal channels refer to banks and large specialists, and informal channels include carrying cash on travel, informal money transfer businesses, etc.

Governments of the world have been trying to reduce the use of informal channels, one of the reason being possible uses for crimes. Why do many people still use informal channels?

Cost is one factor. A research done by European Central Bank estimated that the combined costs to sender and receiver are estimated at 5 to 15% with formal channels and 2 to 5% with informal channels. Informal channels are much cheaper.

Another reason is that the receiver or the sender does not have a bank account or is not used to Internet banking. Remittance is usually people from poor countries sending money they earned in a foreign country to their families back home. If the recipients use cash rather than banks, it will be inconvenient to transfer money via banks.

Also, transferring money overseas takes a long time. Using banks, it takes at least a few days.

Cryptocurrency, with its low costs and high speed for a transaction, is a great technology for the remittance market. Already related services are emerging in Africa and south east Asia.

It is not just personal remittance. BitPesa, a startup that handles business payments to and from Africa using cryptocurrency, is processing about 10 million USD in 2017 or 10 times that of a year ago. The founder Elizabeth Rossiello said that Bitcoin's problems like raised fees and slowed transaction are tiny compared to those of African financial system.

Target market candidate – Cross-border ecommerce

Cross-border ecommerce is an area that is growing very fast even within the ecommerce.

But there is a problem. You have additional costs compared to domestic ecommerce.

Credit card companies charge more than 1% of fees to sellers. In addition to 3% fees that already exist. 1-3% of fees are charged to buyers as well. Not trivial.

For cryptocurrency, it does not matter whether a seller and a buyer are in the same country or in different countries. It will cost to convert cryptocurrency to fiat currency, but it will still cost lower. The fees to exchange cryptocurrency to fiat are usually 0.2% or lower.

Some criticize that cryptocurrency will be difficult to use in commercial transactions due to large fluctuations of price. That means a great risk of currency exchange loss.

Target market candidate - micropayment

Micropayment is a problem long overdue. Financial institutions that maintain a large staff and expensive facilities cannot welcome micropayment. Fixed fees charged for payments via banks, credit cards, or Paypal are as good as a shield against micropayment.

Without a good solution, markets for micropayment have not been developed. There is an approach that you deposit some amounts and pay with points, but the limitation is clear.

Once micropayment is feasible, it can generate a lot of possibilities. Currently many music treaming services charge monthly fixed fees, but with micropayment you can pay each time you listen to the music. You can buy icon images for web design one at a time. You can pay a few cents or tens of cents.

Cryptocurrency can make the micropayment a reality. Bitcoin, the vanguard of the cryptocurrency, is not optimal for micropayment due to heightened fees, technologies like Lightning Network are being developed that could make transacting at low fees possible again. When we have a technology proven in the market, micropayment will be able to become a blue ocean for cryptocurrency.

Target market candidate – Country whose fiat currency failed

In some countries, cryptocurrency seems to be able to play the role of national currency or a complementary role at least.

In the early 2000s the agriculture industry in Zimbabwe collapsed due to inflammatory politics of president Mugabe, and the government ran out of money. To finance expenditures like salaries for government employees, the government issued a massive amount of Zimbabwe dollars. The value of Zimbabwe dollar collapsed, and people had to carry a lot of currency around to buy goods. Here are the inflation rates of Zimbabwe back then.

• 2001 - 112.1%
• 2002 - 198.93%
• 2003 - 598.75%
• 2004 - 132.75%
• 2005 - 585.84%
• 2006 - 1,281.11%
• 2007 - 66,212.3%
• July 2008 - 231,150,889%

(Source: https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe#Inflation_rate)

The last number is not a typo. It is 231 million percent. An unofficial measurement says it went up to 80 billion % in November 2008. It is apparent that the currency stopped functioning normally.

Then the government designated a few foreign currencies including US dollar as legal tender in addition to Zimbabwe dollar. Then the inflation was brought under control.

But another problem appeared. They fell short of currency. It happened because Zimbabwe has more import than export, and more and more people kept dollars home or transferred to banks overseas. That led to currency shortage as severe as to make daily commerce difficult.

As the Zimbabwe government and banks could not issue US dollars, they did anything they could imagine.

• Restricted the amount of cash withdrawal per day.
• Imported cash. (Yes. They literally imported money.)
• Encouraged using cattle for transaction. (That's right. Cattle became currency.)
• Issued bank notes that were pegged to the US dollar. (The government guaranteed 1 to 1, it is exchanged at up to a 50% discount.)

Economist Vince Musewe said this.

"Then, there was plenty of cash money, but no goods in the shops. Now, there are goods on the shelves but no money to buy them with."

Lack of well-functioning currency is a good environment for the adoption of cryptocurrency. Actually strong demand of cryptocurrency emerged. In Zimbabwe Bitcoin often trades at 80% higher than at the global market price.

There are other countries experiencing similar situations.

Venezuela, another country experiencing hyperinflation, is not importing foreign currency, which makes it more reliant on Bitcoin.

Indian government did a currency reform in 2016 to solve such problems as dark money and counterfeit bills. 500-rupee and 1000-rupee bills were invalidated overnight, and new bills were issued. During this chaos, demand for Bitcoin increased 20-30%, and its price shot up over the global price level.

A good way to identify a good target market is to see who uses our products. In a hyperinflated country where national currency is not doing its role, cryptocurrency is not a future technology but an immediately viable alternative.

I have not dealt with this in valuation scenarios, but how large are these economies? According to the data from the World Bank, there are 10 countries that have more than 10% of inflation rate, and their total GDP was 980 billion dollars. That is larger than the remittance, one of the scenarios that we have seen before. Assuming many of them are not in a good economic condition, the market whose national currency is not functioning well may be larger.

Strategy 3: Let people know where they can spend cryptocurrency

Most people who own cryptocurrency right now do not for consumption but for investment. Thus coinmarketcap.com, the most popular website for cryptocurrency investors, is filled with investment related data. Price, market cap, price change %, trading volume, etc.

Individual coins promote mainly technology, support of famous investors, or alliance with a large company or a government.

That information is good for promoting how progressive our coin is and how bright a future it has, but it has little to do with actual use of the coin. Current competition among cryptocurrencies is closer to an IR to attract investors. But there is not enough competition to broaden the user base. It is time for adoption competition now.

Then coinmarketcap for adoption should exist. We need an information service that helps people who want to buy goods and services with cryptocurrency. There is a service for offline use, but we should be able to search for online as well.

Individual cryptocurrencies should share information on their websites about where they can be used.

Diffusion of such information will change the dynamic of cryptocurrency competition. Adoption and use in real commerce, not just technological superiority and big alliances, will become the key criterion to tell a good coin from a bad. And coins will make more efforts to be adopted.

Strategy 4: Align technology with adoption

Even technological development should aim for increasing adoption. You should remove barriers to an immediate use.

Scalability is well known in the cryptocurrency market. Still, from an adoption standpoint, there may be different priorities.

As for Bitcoin, the first issue to address is the transaction fee. It has continued to be over 1 USD since May 2017, reaching 55 USD on average on December 22, 2017.

Micropayment, which I presented earlier as one of the target markets, is impossible at such a high fee level. Playing De facto national currency role in a hyperinflation country will be difficult as well. It may still have competitive edge in remittance or cross-border ecommerce, but the gap will be much smaller and could even be reversed.

And then comes the transaction speed. It may not be a big problem for remittance with cryptocurrency to take a few hours, as it will still be faster than other remittance channels that take days. But buying something online or offline, a consumer will not wait for a few minutes not to mention hours. We need to make it fast.

Transactions per second (TPS) needs some thinking. Paypal's is at 115 TPS, and Visa at 2000 TPS. But many people say that cryptocurrency should not just go beyond those numbers but handle hundreds of thousands per second. They say we need that level for a global currency. It is also said that applications which will generate a lot of transactions will appear.

But it is not certain if that is a reasonable goal. On December 14, 2017, Bitcoin recorded the highest transactions of 490,000. That means 5.7 TPS. The level of Paypal, not Visa, will be more than sufficient.

You need to address the problem of not processing even a few transactions per second, but you don't need to pour your resources to achieve 100Ks per second. The number may look impressive to an investor but does not really matter to a consumer as long as his or her transaction goes through quickly.

Another is the wallet. For the email's mass adoption, email clients that are easy to use made a great contribution. Later, web mail services like Hotmail and Gmail played a decisive role. Likewise, wallets that you can use with ease on your smartphone or you PC are very important for popular adoption of cryptocurrency.

One important element that will make it easy for a user to use a wallet is convenience of its address. If an email address was something like 63.84.271.59, people would feel much harder to use. It goes without saying how unfriendly a cryptocurrency wallet address of dozens of random numbers and characters is. It is important to make an easy-to-use and friendly address.

Sending coins over an email or an SMS will also contribute a lot in making it easy to use.

A cryptocurrency debit card will be also useful. Bitcoin payment processor Bitpay's card grew 15 folds during a year from August 2016.

Strategy 5: Increase assessment of coins

A criticism about cryptocurrency, especially about ICO, is that there are many coins that deceive consumers. Thanks to overall investment fever, coins that have a weak basis in technology and business and even fraudulent ones are enjoying a large market cap.

Frequent news reports of cryptocurrency related crimes are leaving bad impressions on people. They will affect adoption negatively.

It is very difficult for common people to filter out bad coins from good among over 1500 cryptocurrencies. We need professional and objective evaluations on cryptocurrencies.

Weiss Ratings, in January 2018, released a cryptocurrency ratings report, the first for an investment ratings specialist. It was noted that they gave A to none of the 74 coins they evaluated and C+ to Bitcoin.

They used 4 indices of risk, reward, technology, and fundamental. I am not sure if it makes sense to include risk and reward that are not basic strengths of a coin. Nonetheless, the fact that a systematic evaluation came out is worth welcoming. I hope to see more ratings with rigorous methods.

Helped by such evaluations, good coins will grow faster, and bad ones will die out. Surviving coins will be used by more people, they will become even more attractive for adoption.

Strategy 6: Solve government's problem

Cryptocurrency started on the libertarian ideal that does not trust government-controlled currency. Bitcoin inventor Satoshi Nakamoto left this remark.

The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.
(Source: http://satoshi.nakamotoinstitute.org/quotes/economics/)

He thought that decentralization is a merit that will keep Bitcoin alive if the government tries to shut it down.

Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.
(Source: http://satoshi.nakamotoinstitute.org/quotes/government/)

With this history of genesis, cryptocurrency developers often show animosity against central and governmental control. It is a reason why anonymous coins are popular.

But I think the thought of fulfilling this ideal completely will make barriers in the real world. The government does not always do good for people, but as long as we live in a world with a government we need to engage in a minimal cooperation.

The most obvious is transaction information. The government needs to know who bought what for how much to impose taxes. It also needs certain amount of the information to prohibit cryptocurrency from being used for money laundering or other crimes.

Some say that cryptocurrency can be used for crimes due to its privacy, anyone with a basic knowledge of cryptocurrency knows that it is not true. Except for some anonymity-centric coins, a cryptocurrency can leave transaction records even more transparently than a fiat currency. I believe a proper balance between privacy protection and sharing necessary information will make it acceptable for both sides.

Private cryptocurrency and national cryptocurrency

I cited issuance of national cryptocurrency as a likely response of the government. If that actually happens, will cryptocurrency follow the fate of the private banknotes of the 19th century in the US?

It will be difficult for the government of a major country to issue cryptocurrency in the near future.

When the paradigm of the market changes, not many incumbents keep the status. Large corporations who gave up the hegemony to an innovative newcomer were many, including Sony in TV, Kodak and Polaroid in photography, and Blockbuster in video rental.

The pattern usually looks like this.

1. The incumbent ignores a new technology when it first appears. "It is a toy." "Long way to go."
2. As the technology grows further, the incumbent starts thinking of it as a threat. They start talking about the problems. They don't yet think "This is an opportunity" or "It is better for us to steal our market ourselves than to be stolen by others."
3. When the technology becomes even larger, they adopt the tech and launch a business. But they don't invest aggressively, lest the old business get hurt.
4. When it becomes clear that the new technology has taken a firm position and a crisis is imminent to the old business model, they make large investments into the new tech. But the tide has already turned for the new champion.

For the new technology of cryptocurrency, the responses of governments, banks, and other financial businesses have been mostly close to #1 above. They only had an interest as a curious technology. Since the second half of 2017, it starts to feel like #2. Their main concerns are about consumer damage, money laundering, and other public interests, but a sense of fear, how small it might be, is felt.

What about from now on? It will be different by country, but I think it is still likely to follow the above pattern. That is, the government is not likely to issue a national cryptocurrency soon. For the following reasons.

• It is hard to decide whether to issue a national cryptocurrency, as the cryptocurrency itself has not been fully proven yet. There is a lot of uncertainty of technological stability, consumer usage, etc. Until proven more, the government is not likely to start developing one. We don't know it was for this reason, but the treasure secretary of the US said that there was no reason for immediate implementation.
• Incumbent national currency makes up an ecosystem together with financial services like banks and credit cards. The government implements monetary and financial policies through it. The financial service institutions are not in favor of cryptocurrency. Therefore, it will take quite some time to form a consensus.
• Even if they start development efforts, it is likely to take a long time. There are different directions of blockchain technology, so even that decision will be difficult. Because a national cryptocurrency will be required of a higher security level, development can take longer. Legal and political preparations are also necessary.
• No matter how carefully they prepared, they will have problems for a while after launch. Bitcoin came out in 2009, but it still has many problems. It could be less difficult for national currency thanks to cryptocurrency having gone through many of them already, but nevertheless they will make their own trials and errors. Only after this period it would really be usable.

National cryptocurrency will not ruin private cryptocurrency

Let's compare competitiveness of national and private cryptocurrencies.

• Brand: National cryptocurrency ≈ Private cryptocurrency
• International transaction: National cryptocurrency < Private cryptocurrency
• Domestic transaction: National cryptocurrency > Private cryptocurrency
• Anti-inflation: National cryptocurrency < Private cryptocurrency
• Economic policy: National cryptocurrency ≈ Private cryptocurrency

We can say brand for currency is trustworthiness. In advanced countries, national cryptocurrency ranks higher. But in countries with low trust of the government, it could well be the opposite.

Especially for small amounts, private cryptocurrency will be superior in international transactions. National cryptocurrency will not be totally free from existing financial system, it is likely that its fees for oversees transactions are higher than private cryptocurrency's.

For general domestic transactions, we can expect national cryptocurrency to have more advantage. As the currency has always been used, price tagging is easier and so is tax reporting. They could even give you some benefits in tax.

Private cryptocurrency is superior in fighting inflation. Most private cryptocurrencies have a fixed maximum supply, which will lead to an economy with gradual deflation. But if the government issues national cryptocurrency at will, it cannot avoid inflation just like fiat currency. Decline of currency value and trustworthiness is possible.

There will be pros and cons from an economic policy perspective. Under governmental control, national cryptocurrency is better for policy implementation. You can execute quantitative easing like during the great recession from 2008. For policy makers, it will be wanting to not be able to utilize a monetary policy in a crisis. Though it is not clear if those policies result in better economy and currency.

Private cryptocurrency could be helpful to operating a national economy. If national currency is used by foreign companies and governments, it can be burdensome even for a large country's economy not to mention for a small one's. This kind of concern seems to be leading China to preferring a multilateral effort rather than going independently to assume the role of an international currency.

Considering all these, national currency is not likely to drive out private cryptocurrency.

Still… Will government leave it alone?

Talking to people who view cryptocurrency negatively, I see them having a final barrier even when they concede logically.

"There is no way the government will let cryptocurrency be currency."

The history that many private currencies in the US in 19th century strengthens the argument. Are cryptocurrencies of today destined to go the same way? I don't think they are.

Cryptocurrency of today is different from private currency of 19th century

The primary responsibility of private bank notes' demise lied with banks themselves.

When banks issued banknotes in 1-dollar denomination, they promised to convert such a note with 1 dollar of gold. Knowing not many people came to redeem, however, they issued much more than the gold they had. People began having doubts about the credibility of the banknotes. When many people suddenly demanded redemption, they could not keep the promise. They went bankrupt, and the notes people possessed became scrap papers.

Most of today's cryptocurrencies don't have that problem.

First, they don't pledge to redeem for gold or anything, and therefore have no credit risk. This is one of the reasons why they are criticized as having no intrinsic value, but I refuted that previously.

There are such cryptocurrencies like 19th century private banknotes. The most famous is Tether, which promises to redeem in US dollar for 1 to 1. Founders of Tether insist that they have more assets than circulating Tether, but the suspicion does not seem to die off. For this kind of cryptocurrency, history of private banknotes is a very relevant case.

Secondly, most cryptocurrencies are created with a predetermined supply or supply schedule, like up to a certain amount and no more or a fixed amount every year. Developers cannot issue more coins at will just because they need money.

Thirdly, most cryptocurrencies are made as an open source. We call them 'private' currencies, but it does not mean they are managed by private companies. It only means that it is not managed by the government. In the sense that they are not managed by an individual or a business, they are closer to the Internet or the Wikipedia.

Usually the development team starts out as a community rather than a legal entity, and after some progress they form a non-profit foundation. There are development teams that work as a for-profit company, but it is the same that the fate of the open-source cryptocurrency and that of the company are separated. If the community for a cryptocurrency keeps the blockchain network, the cryptocurrency will continue, even when the development team goes bankrupt. Though of course it will damage seriously if the dev team falls in the middle of development.

In summary, today's cryptocurrencies and 19th-century private banknotes are different enough not to have the same destiny.

The issue of constitutional rights

I have another reason to believe cryptocurrency will have a different fate from that of the past private currencies. Cryptocurrency is, no matter if it will be legalized or not, already an asset that people take dearly and trade voluntarily, and it will be difficult for the government to find a legal ground to block.

People's sense of rights is incomparably higher now than in 19th century and formation of public opinion is very active with Internet, and it is hard to imagine people and businesses will back down obediently to even a government policy. The constitutional appeal in Korea shows an example.

Some countries eager to take this as an opportunity

Some countries see cryptocurrency as a threat and are trying to regulate, but others view it as an opportunity to move ahead of other countries and cities.

Belarus decided to legalize cryptocurrency trading, ICO, mining, and even to exempt taxes for income for 5 years from these.

The economics minister of Switzerland said that cryptocurrency was a part of 4th industrial revolution and Switzerland should take the lead on this front. He also said that Switzerland should become a crypto-nation.

In Arizona state, legislators are discussing a bill that will allow people to pay taxes in cryptocurrency.

Monetary policies are possible to a certain degree with cryptocurrency

From the government's perspective, cryptocurrency may not seem easy to implement monetary policies with. But it is not necessarily so.

You may not be able to issue in addition to a predetermined supply, the government can still buy and sell cryptocurrency in the market. That is, it can control the circulation to an extent, apart from the question of whether that is really needed.

Tom Lee, a top Wall Street strategist, predicted that central banks would consider buying cryptocurrencies if the total market value reaches $500 billion.

History will be different

For these reasons I don’t think the history will repeat itself. Cryptocurrency, more accurately private cryptocurrency, will survive.

Remaining questions and thoughts

Now I have done the overview about cryptocurrency. But there are more detailed issues that I don't have answers to yet.

Which cryptocurrency will survive, and which will die out? We have competition among individual currencies, but we can also group them into similar models. Some are pure currencies, and others have smart contracts to perform other functions. Still others emphasize anonymity. Which model will be the major one is an important question that will determine the direction of cryptocurrency.

Cryptocurrencies that specialize in exchanges, logistics, contents, and social media have appeared and are still appearing. Do we need such specialized coins? Or general-purpose cryptocurrencies will be sufficient? These are important questions that will shape the cryptocurrency market.

I wish I could discuss these issues some time.

Now let's see how the world evolves. Put aside what the results will be for a moment. How lucky we are to be able to observe a profound experiment to challenge our long-held beliefs!