Adoption of Crypto-Currencies in Poorly Managed Economies as a Network
To a non-economist, central banking and taxation may appear as comparatively distant concerns in nations where basic necessities including clean water, food, and medical care have become luxuries. In the face of an awareness of the profound and needless struggles of a population, the knee-jerk reaction is to donate or provide aid. While noble and impactful in the immediate future, “humanitarian aid” quickly becomes a shared band-aid where the areas of the world with the most newsworthy struggles receive a temporary crutch until a more flashy global struggle arises. For misery arising from a single disaster, for example, throwing money at a society can help it recover, as with the global response to the 2004 tsunami in Indonesia, for example (https://www.theguardian.com/world/gallery/2014/dec/11/then-and-now-the-aftermath-of-the-2004-indonesian-tsunami-in-pictures). A tremendous fraction of human misery arises, however, from systemic problems stemming from governance. Authoritarian governments rife with corruption (as seen in several Central African countries, see https://www.telegraph.co.uk/travel/news/the-worlds-most-authoritarian-destinations/) and poorly managed economies with absurd inflation rates (such as Venezuela’s literal million percent inflation, see https://www.forbes.com/sites/stevehanke/2018/10/23/venezuelas-hyperinflation-24-months-and-counting/#6fbaff78162d) cannot perpetually be sustained with external aid. Such aid is especially unnecessary in some cases – such as Venezuela – where a country with abundant profitable resources falls victim to poor economic management.
Thankfully, a potential solution to economic mismanagement has emerged in the form of cryptocurrencies. In wealthy countries, cryptocurrencies are frequently mocked for their high volatility, but, incredibly, they serve as more reliable alternatives to currency in countries with terribly mismanaged monetary policy. Unsurprisingly, several such nations in Africa – and even relatively well-functioning ones – have begun massively adopting cryptocurrencies to conduct business: see https://www.investopedia.com/news/africa-next-big-market-cryptocurrencies/. As the article mentions, while many use the obvious candidate, Bitcoin, some other home-grown currencies have emerged, such as BitPesa in Kenya. From this developing trend arise, one ca model and forecast the future proliferation of cryptocurrencies in economically mismanaged countries by analyzing network effects on demand curves.
Of course, a cryptocurrency undergoes network effects, since its value increases as more individuals use it. A cryptocurrency with a handful of users is obviously much less powerful than the one used by hundreds of thousands. Fascinatingly, though, cryptocurrencies deviate from traditional “network-effect” goods since there is no explicit cost to using them as there are for purchasing most goods. However, there does exist a certain cost in the form of “risk” given the volatile nature of cryptocurrencies. Because of these joint effects, the market for cryptocurrencies can be modeled similarly to the r(z)f(z) curves in Chapter 17 of the textbook, where the possible equilibria are either z=0 or some high fraction z at the higher intersection of the reservation price and the trie price. Currently, we observe a non-zero equilibrium (since a non-trivial fraction of individuals in mismanaged economies use them). We also, however, do not observe the expected equilibrium where a very high fraction of people use cryptocurrencies – evidenced by the non-trivial value of existing government-managed currencies. As the article mentions, however, it appears the use of cryptocurrencies is growing in countries with runaway inflation. This, paired with the article’s mention that little regulatory enforcement is impeding the growth, indicates that cryptocurrencies may eventually reach a very high fraction equilibrium, perhaps to the point where a majority use one as an alternative to their native currency. In fact, given the increased appeal of a unified and relatively stable currency that can be used across borders, the true equilibrium may be even higher than that predicted by a closed-market model. While gradual, this momentum towards decentralized currencies will likely maintain itself according to network market models. Fully modeling this progression could not bring powerful investment opportunities, but help us forecast the well-being of nations whose goverments needly stiffle their developments.