A new currency is typically a volatile currency. After all, how can it be considered stable if it has no record? Crypto is still a currency newcomer, and so, still volatile. Yet, our safest fiat currencies were once new and had to work their way to stability. How might cryptocurrency–and Bitcoin especially–do the same? We’ve read uber-academic articles on this subject, so you don’t have to. Here, we’ll discuss currency stability in the simplest language possible.
When is currency considered stable?
According to New World Economics, a currency is stable when its value doesn’t change significantly over time. Various factors contribute to stability, such as economic policies, inflation, interest rates, and even trust. In currency, optics matter. This stability leads to greater mainstream use, which only contributes further to the stability of the currency.
Even with stable currencies, inflation will happen, and it is not necessarily a bad thing. Without a moderate level of inflation, (usually considered to be around 2% a year) the economy could start to trend downwards. This is because prices would fall with increased efficiencies, triggering consumers to spend less and be more selective by looking for the best prices. When consumer demand drops, businesses and the economy are impacted as a result.
What are examples of stable currencies?
The Japanese yen, Swiss franc, and U.S. dollar are all relatively safe currencies, according to Morgan Stanley in 2020. One of the primary reasons why: They’re backed by nations with strong economies. Because of the strong economies and governments backing these fiat currencies, they are stable, safe, and even used for other nations. As stated earlier, this wider exposure only further increases their stability.
Why has the U.S. dollar been stable for so long?
The simplest answer: The U.S. dollar is stable because it is widely used.
The U.S. dollar is the national currency not just for the United States but also for Ecuador, Zimbabwe, El Salvador, and others. It’s the international reserve currency and comprises 60% of all known central bank foreign exchange reserves. As of 2018, $1,671 billion in U.S. dollars were circulating.
A currency is strong when people and businesses trust it.
How can Bitcoin become stable?
The two best ways that Bitcoin can become stable is through greater use and hedging against inflation. These two methods can work together to make Bitcoin a much more stable currency.
Bitcoin Needs to Become more Widely Used
Like we mentioned earlier, the more a currency is used, the more stable it is (typically). That is why you don’t hear about massive inflation/deflation of the U.S. dollar, the Japanese Yen or other widely used currencies. You do hear about small local currencies used by a single developing nation that get hit with massive amounts of inflation.
Take the Zimbabwean dollar, for example. It is used by a much smaller audience than the U.S. dollar. The government is far less stable. Their economy is much less developed and consistent. These are just a few of the reasons why Zimbabwe experienced hyperinflation to their currency. In 2008, they saw inflation of 98%… per day! Their currency soon collapsed and then started using the U.S. dollar.
Bitcoin needs to be widely used by very different groups of people to avoid the same fate. That way if one group struggles, it doesn’t take the whole system with it. The best way to stabilize a volatile currency is through use. The more people who own Bitcoin and conduct business in Bitcoin, the more it stabilizes. It’s no coincidence that Bitcoin’s popularity is growing in countries with unstable financial systems, like Venezuela and Zimbabwe. There, Bitcoin is more stable than the national currencies.
Bitcoin Needs to Hedge Against Inflation
Nearly all countries deal with inflation from time to time. It is often a sign of a healthy and growing economy. While the U.S. attempts to keep their inflation rate to 2%, many developing / underdeveloped countries have a much tougher time with this. A government in financial distress or a rapidly expanding economy are the two most common reasons for inflation. Take Zimbabwe for example, their government printed all that money because they had debts and a war to pay for. That devalued their currency and collapsed their economy.
Bitcoin has the possibility to hedge against such inflation happening. The thought process behind Bitcoin is that no single entity can manipulate it like fiat currencies can be. When working correctly, no government entity would be able to just “make more Bitcoin” to increase supply. As mentioned previously, this has major appeal right now, especially to countries with unstable financial systems. El Salvador’s acceptance of Bitcoin is an excellent example of this.
While some speculate or are already sold on Bitcoin as being a hedge against inflation, only time will truly tell. But if it can resist inflation and market manipulation, that will only help it become a more widely accepted currency.
If that happens, Bitcoin will become much more common. And as Bitcoin becomes more common, it incurs more trust, which improves stability. Like we said, optics matter.
As we mentioned previously, the best way to stabilize a currency is to increase its use. So go out there and buy some Bitcoin!
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