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The Bitcoin community had its Big Moment recently, worthy of the two capital letters: For the first time in history, El Salvador granted Bitcon legal tender, effectively recognizing it as a currency. For all the hiccups in the launch of this grandiose experiment, not excluding the mass protests, isn’t there something truly historical about being able to pay your taxes in Bitcoin? I mean, even coffee must taste different if you bought it with crypto. The question, however, is why would you ever do that?
Let’s take a step back and consider a major criticism crypto enthusiasts often lob at fiat currencies, including the greenback, until recently the lifeblood of El Salvador’s dollarized economy. Fiat is inflationary. The government’s ability to just go ahead and print more money, like the U.S. did during the pandemic, slashes the purchasing power of fiat currencies over time by reducing their scarcity.
Bitcoin is scarce, and that’s one of its biggest selling points. Bitcoins get progressively harder to mine as the coin’s supply goes up, and, by design, its maximum supply is hard-capped at 21 million. As long as a nation exists, it can keep printing more cash, but once Bitcoin hits the 21 million mark, it’s no longer an option for the network. Assuming the demand for Bitcoin picks up on the back of growing crypto enthusiasm, its scarcity will work to drive up its value over time, making it deflationary.
Now, back to El Salvador, where we are about to get our Starbucks. Imagine we have both Bitcoin and dollars to pay with. If we pay with Bitcoin — a coin largely seen as deflationary, with its value expected to go up in the long run — we reduce our future gains by swapping the appreciating asset for a cup of Joe. If we pay with USD — a currency expected to lose value over time — we reduce our future losses to get our coffee. Which are you choosing?
What’s happening under the hood
In a way, this problem comes down to the way our brain works. We humans really hate the feeling that we are missing out on something, so much so that FOMO — an abbreviation for “fear of missing out”— is now included in the Oxford Dictionary. FOMO has also made its way into investors’ minds (or maybe it was always there, we just lacked the right word), prompting them to make decisions that would have otherwise been questionable.
Just this year, Dogecoin shot up like crazy, by thousands of points, making for a perfect example. How many opportunistic investors hopped on this bandwagon before the coin collapsed to a far more modest price? Hundreds, I would imagine. And what got them there was the fear of losing out on the colossal gains that others were seemingly riding right into.
To me, it seems like the fear of missing out is a natural obstacle standing strong in the way of mainstream crypto adoption. Even when it comes to something as minuscule in terms of your overall spending as a cup of coffee or a pizza, slashing your possible future gains when you could get rid of an inflationary asset instead seems barely reasonable. This is the thought I can’t escape whenever I hear of this or that company accepting Bitcoin. As pleasant as it is to know you can buy a car with your crypto, would you do so if, in a year, you may be able to buy two for the same amount?
Granted, there are more things to consider here, especially when it comes to countries with an unstable economy or socio-political situation. Bitcoin works great for remittances, a major part of El Salvador’s economy, and in Venezuela, crypto makes for a great tool against inflation and can also be used for everyday payments in some places. But these are, arguably, the extreme cases. But not all cryptocurrencies are made equal, and the design of other coins may help with tackling FOMO for those privileged to have less to worry about.
One for all and all for one
The cryptoverse is gargantuan at this point, with thousands of coins listed on hundreds of exchanges, but we don’t have to go too far to look for examples of design decisions that may tackle the mighty FOMO problem. As infuriating as this may be for Bitcoin enthusiasts, Ethereum’s take on capping the coin supply could help out on this front.
Instead of a hard-coded cap on the maximum amount of coins out there, Ethereum limits the number of new coins that can be minted annually. In a way, this still ensures scarcity, or at least protects the users from the prospect of a sudden influx of new coins. Crucially, users can still rest assured there will always be more Ether, if not this year, than the next one. Parting with a few dozen to buy a new car does not feel the same in terms of the rarity of what you’re giving away.
Some mechanisms utilized by alt-coins could also come in handy in this respect. One such mechanism even makes the coin more deflationary than Bitcoin: Instead of paying the gas fee, the fee for adding the transaction to the distributed ledger, to the miners, some protocols like the asset-backed AXIA Coin, as well as Ripple, burn them off. In other words, every transaction in the supporting ecosystem of such a coin amps up its value through added scarcity. This makes such coins deflationary assets, even more so than Bitcoin, but at the same time, in order to get future gains, you have to make new transactions. It is an interesting positive reinforcement loop with benefits for the whole community, and I can see its value as a bulwark against the omnipresent FOMO.
Of course, there are more obstacles to brave before crypto can become as ubiquitous as the greenback, and there are more arguments for, respectively, Bitcoin and Ethereum for people to clash over. And yet, I cannot help but think one of these obstacles is in our own minds, in how we perceive crypto and what we want from it. As long as we expect coins to rise to the moon, tokens will need to figure out some extra mechanisms to quell our built-in desire to max out our gains whenever we invest.