Hoarding and Demurrage

What happens when you invest in cryptocurrency and just let it stay put? Coin Pursuit takes a look, and explains why that isn't always a good idea.

In a previous section, we touched upon the fact that some investors in cryptocurrency like to tuck it away and leave it be, in the hopes it will gain value over time. From a strict investing viewpoint, this is both wise and harmless; the “file it and forget it” method relies on an eventual upward trend. At some future date, the currency can be sold at a higher price than was paid upon purchase. If all this goes well, the investor will cash in on a healthy return on investment (ROI). In theory, it's a great plan—at least for the investor.

However, buying digital currency and stashing it away is often frowned upon in the industry. Everyone who invests in a certain type of cryptocurrency is also, in effect, an owner—so it's in their best interest to keep their share of the market lively and active. The more their digital currency keeps in circulation, the more stable and valuable it's likely to be—and currency that's just sitting there doesn't do much.

It's called “hoarding.” Any currency that's hoarded—and isn't in circulation and boosting the market—can be an overall drag on the market and its investors. There's no law or guideline against it in any cryptocurrency, but some choose to levy a fee (usually a percentage of the individual's investment) against any account balance that isn't being used. This fee is referred to in the financial industry as “demurrage;” it's essentially a premium paid for inactive currency—and to put a little back into the system to make up for the amount that isn't circulating.

It's not that hoarding is a major problem in the digital currency industry, but demurrage rules are there to make sure it doesn't become one. Most investors know the importance of keeping their currency active; they'll set aside some for pure investment purposes, and use the remainder for trading, to assure a robust market.

Next Cryptocurrency Topic: Stability of Cryptocurrency 

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