Cryptocurrencies are rarely relied on for everyday transactions. Possibly because they have, so far, been expensive, slow, and cumbersome to manage. Things are changing on this front with protocols like Dash, which claims to be able to confirm transactions in less than one second, and to handle thousands of transactions per second for less than fifteen cents each and going down. Another possible reason for not using cryptocurrency for normal transactions is the lack of reliability or security. This, too, is changing with the many new protocols that have firm backing from respected investors and strong development teams. Bitcoin itself has proven that the blockchain model is extremely resilient to faults over its ten-year history. It’s also possible that cryptocurrency is not widely used due to the lack of adoption by merchants – but this theory fails to hold water as well since there is almost no overhead to merchants in accepting digital currency and it is logical for merchants to support any payment method that customers want to give them. In fact, digital currencies are far more immune to chargebacks and charge lower transaction fees, so merchants would naturally prefer them. The real problem can be found through examining the perspectives of the parties to the transaction in turn. First, let’s consider the merchants who do accept digital currency payments now, such as Amazon, Microsoft, and Hotels.com. These integrate BitPay into their platforms, allowing customers to pay using Bitcoin. But none of these merchants actually keep their money in Bitcoin – instead, they immediately convert all accounts receivable to USD. Why? The answer is obvious: the price of Bitcoin is not stable, and merchants are not traders who want to speculate on whether the asset will go up or down. Liu and Tsyvinski quantify the risks present in the largest cryptocurrencies, showing how they vary 37-58% from month to month. Most businesses aren’t willing to risk a 5% variance on a multimillion overnight payment, much less tolerate holding cryptocurrency in the face of large potential swings. Just as they wouldn’t hold their money in barrels of oil, they are not likely to hold digital currency for any length of time, since the value could drop suddenly and drastically, putting them in a difficult cash flow position. Even those who support and promote cryptocurrency are unlikely to keep their cash reserves or quarterly revenues in this asset. Second, let’s imagine trying to make a purchase using a wildly fluctuating asset like Bitcoin – you won’t know how much the item costs from minute to minute, and you worry that you’re going to spend the asset at a low point when you could have held on and gotten a better bargain. This is a terrible dilemma for the user and adds complexity to the already difficult process of deciding on the right product. Or imagine getting paid 1 Bitcoin per month for your job – one month you have enough for all your bills, and the next you fall short. Finally, imagine borrowing money on a loan that demands a 1 Bitcoin payment every month. If the price swings up drastically, you might not be able to pull together enough to make the payment that month. Fundamentally, the problem is that today’s price-volatile digital currencies subject any contract promising or taking future payments to extreme price risk. Therefore, we can see that in order for digital currencies to become a viable medium of exchange or unit of account, we need to achieve price stability.

All currencies have six fundamental purposes: