December 30, 2017 Reading Time: 2 minutes

With 2017 coming to a close, I thought it would be useful to take stock of the market for cryptocurrencies; to reflect on what has gone well over the past year and what improvements might be made in the year to come.

It has been a big year for cryptocurrencies, to be sure. The market capitalization of bitcoin is around $220 billion at present. It began the year at a mere $16 billion, but the network has grown and matured a bit in the time since. Futures markets, for example, launched earlier this month. Although they are still very new, they offer much promise.

Competition is strong. Ripple and Ethereum continue to serve as unique alternatives—one a centralized ledger, the other a platform for a host of decentralized applications. Bitcoin Cash has charted a path to overcome scalability issues, keeping transaction fees low in the process. And upstarts like IOTA, which promises to facilitate communications and payments on the internet of things, have come to prominence.

Much progress has been made in the market for cryptocurrencies. And, yet, there is still much room for improvement.

One of the biggest problems in the market for cryptocurrencies is regulatory ambiguity. According to Coin Center, only nine states have adopted clear and narrowly tailored regulations for cryptocurrencies. Regulatory ambiguity discourages entrepreneurs from supporting existing cryptocurrencies and offering potentially-superior alternatives. It puts an unnecessary and unproductive cap on network size.

Another problem, especially for bitcoin, is scalability. It is hard to imagine how Bitcoin could live up to its promise as global payments system with a mere four transactions per second and transaction fees exceeding $20. SegWit activation was a good first step. But widespread adoption of SegWit in the near term and increasing the block size limit in the medium term are essential.

Finally, we must improve the level of discourse surrounding cryptocurrencies. As the price of bitcoin picked up in the last half of the year, high-profile naysayers—from Jaime Diamond to Joseph Stiglitz—came out of the woodwork. The response from the cryptocurrency community was subpar at best. Many advocates failed to identify the specific applications where bitcoin might function as a superior alternative. Instead, they reasoned from cost-to-value and, when the price slumped, clung to HODL memes.

You can be sure that, in 2018, those of us at the Sound Money Project will continue our efforts to improve the level of discourse surrounding cryptocurrencies; stress the need to scale; and promote clear, narrowly tailored regulations that will not hamper innovation. We hope you will join us.

William J. Luther

William J. Luther

William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News. Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.  

Selected Publications

Cash, Crime, and Cryptocurrencies.” Co-authored with Joshua R. Hendrickson. The Quarterly Review of Economics and Finance (Forthcoming). “Central Bank Independence and the Federal Reserve’s New Operating Regime.” Co-authored with Jerry L. Jordan. Quarterly Review of Economics and Finance (May 2022). “The Federal Reserve’s Response to the COVID-19 Contraction: An Initial Appraisal.” Co-authored with Nicolas Cachanosky, Bryan Cutsinger, Thomas L. Hogan, and Alexander W. Salter. Southern Economic Journal (March 2021). “Is Bitcoin Money? And What That Means.”Co-authored with Peter K. Hazlett. Quarterly Review of Economics and Finance (August 2020). “Is Bitcoin a Decentralized Payment Mechanism?” Co-authored with Sean Stein Smith. Journal of Institutional Economics (March 2020). “Endogenous Matching and Money with Random Consumption Preferences.” Co-authored with Thomas L. Hogan. B.E. Journal of Theoretical Economics (June 2019). “Adaptation and Central Banking.” Co-authored with Alexander W. Salter. Public Choice (January 2019). “Getting Off the Ground: The Case of Bitcoin.Journal of Institutional Economics (2019). “Banning Bitcoin.” Co-authored with Joshua R. Hendrickson. Journal of Economic Behavior & Organization (2017). “Bitcoin and the Bailout.” Co-authored with Alexander W. Salter. Quarterly Review of Economics and Finance (2017). “The Political Economy of Bitcoin.” Co-authored with Joshua R. Hendrickson and Thomas L. Hogan. Economic Inquiry (2016). “Cryptocurrencies, Network Effects, and Switching Costs.Contemporary Economic Policy (2016). “Positively Valued Fiat Money after the Sovereign Disappears: The Case of Somalia.” Co-authored with Lawrence H. White. Review of Behavioral Economics (2016). “The Monetary Mechanism of Stateless Somalia.Public Choice (2015).  

Books by William J. Luther

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