Bitcoin is volatile. It has been known to change by as much as 80% in a single day, the same with other cryptocurrencies. Let’s use an example to understand the problem this would create if the everyday purchases you normally make in Euros were also priced in bitcoin.
If you switched to buying your €3 coffee in bitcoin every morning then its price would be constantly changing. Somedays cheaper, somedays way more expensive – relative to euros.
The long term movement might be up – making your coffee relatively cheaper over time – but this doesn’t help consumers or businesses who need to budget on a day-to-day basis, for which stability is essential.
The situation gets even more unmanageable for rare or one-off purchases of high value goods. Imagine buying a €500,000 house – with the relative cost in bitcoin constantly changing you’ll be glued to price charts desperately trying to time the transaction favourably.
The net result from this uncertainty would be reduced economic activity. It comes down to human psychology — people are less willing to spend an asset if they expect it to increase in value, while they’ll quickly spend a currency that is rapidly declining in value.
Economies thrive on certainty and struggle in volatile conditions, such an unstable currency. In fact one of the main of objectives of Central Banks like the Federal Reserve is to maintain price stability.
Imagine you are the owner of the coffee shop taking BTC payments. What happens if the price crashes just before you pay your employees? Their wages are still denominated in euros. Would you take that chance?
That’s why most people would be unwilling to spend bitcoin, and most merchants would not take bitcoin as payment today. Fiat currencies are just more predictable.
On the flip side, fiat currencies have problems of their own, as we’ve seen in earlier articles.
- Money deposited with a bank is no longer in your control, your card can be frozen, your account blocked.
- If you want to send money to your family in another country you may have to pay hefty sums and delays of several days.
- If you live in a country suffering from hyperinflation. you might not have access to a solid fiat currency.
- The boiling frog problem means your savings are gradually eroded because Fiat isn’t a good store of value.
That’s where Stablecoins come in. By combining the stability of fiat denominations with the decentralised, global nature of cryptocurrencies, Stablecoins can be immensely useful for integrating and expanding the reach of the global economy.
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