A common question in cryptocurrency channels today is: does adoption matter? Here I argue that merchant adoption is fundamental to a cryptocurrency's success. Cryptocurrency has unprecedented potential to disintermediate institutions and sidestep supply chains, creating small-scale P2P economies with very little friction. Each new coin holder and coin-accepting merchant adds value to a coin's ecosystem. Government oversight makes acquiring and exchanging crypto for fiat difficult, but inadvertently creates incentives for merchants to accept crypto and use it as a medium of exchange. Finally, network effect continues to amplify as adoption increases.

We will define "adoption" by the metric: number of merchants accepting a cryptocurrency for payment. Bitcoin Core (BTC) is the dominant cryptocurrency of today's world. Despite BTC's poor scalability and yo-yo-ing price, it has reached this level of status by being the first and most used crypto coin. Thousands of vendors still accept BTC, directly or indirectly through payment processors. Because these many vendors accept cryptocurrency as payment, people who hold cryptocurrency have somewhere to spend their coins. This gives the coin holders confidence that their coins have a redeemable value for tangible goods and services (ie. "I can always buy something at site X, or receive a service from site Y").

As a thought experiment, let's imagine the hypothetical Zexxxcoin(ZXXC), which has no merchants who accept it. A ZXXC coin holder can only value their coin by looking at market price charts. Since ZXXC coins are not redeemable for goods and services, their value is only for exchange to other currencies. In turn, we can quickly deduce that ZXXC coins have only speculative value. Since no merchant wishes to accept ZXXC, why would anyone ever buy this coin?! ZXXC likely has a very limited future, and clearly has marginal utilty and little purpose (some might call it a "shitcoin").

Let us now imagine a cryptocurrency which is widely accepted, but from the perspective of a merchant. A merchant wishes to profit and does not like to be exposed to risk. Most merchants who accept cryptocurrency would like to hold cryptocurrency for short time intervals, to mitigate the risk of a payment they received losing value. But if there is a reasonable chance they could hold the crypto for a short time period for additional gains in value, they might hold some or all of the crypto coin they are paid in .

When a cryptocurrency is experiencing growth and seeing more and more merchant adoption, a feedback loop is started. For each additional known merchant accepting a coin, every coin holder receives an affirmation of that coin's utility and strength, because yet another person trusts this coin, believes this coin has value, and signals that this coin could be useful. Therefore the coin gains tangible value: each additional member of the ecosystem brings additional investment of: money, goods and services, time, and effort. Also they increase the coin's network effect. A crypto merchant is taking a risk, but also stands to benefit when others enter the ecosystem, which completes the feedback loop. Note that removing merchants from the ecosystem similarly harms the coin's value and network effect, lessening feedback. Likely some of BTC's spectacular crash from $20k to $3k can be attributed to the widespread abandonment of BTC as a payment in 2018.

Furthermore, there is a simple reason for someone to accept crypto as a merchant. Let us consider from a practical perspective the state of regulated on-ramps to cryptocurrency. In order to acquire crypto, the average person has to register with an exchange site, submit copies of very sensitive personal documents, undergo some sort of vetting by a 3rd party, wait several days, and then spend hours dealing with their banking institution to move funds into their exchange account. They also run the risk of having their bank transaction denied, or worse still, having their banking and/or crypto accounts frozen. It's a difficult process to acquire cryptocurrency, even for the dedicated.

But a merchant suffers none of these myriad problems with acquiring crypto - they simply offer goods and services for sale, and accept crypto payments via a POS app or a wallet address (posted on a blog or sent via SMS, for example). A merchant can receive their first crypto payment with less than 60 seconds of work! This means that one of the easiest ways to acquire crypto is to accept it as a merchant. The Internet abounds with stories of people who were paid in Bitcoin BTC for goods and services in the early days, the most famous being the 10000 BTC pizza purchase. Merchants form the backbone of a new economic ecosystem, and in crypto some of these merchants have been handsomely rewarded (while others who were caught selling illegal goods were not so fortunate, and are stacking license plates rather than "sats").

The process of exchanging crypto back to fiat can also be cumbersome. Everyone in a crypto ecosystem is thus incentivized to spend their coin with another crypto-enabled merchant, rather than navigate byzantine financial and crypto exchange systems. Certainly not all will hold their coins, but those that do only decrease available supply. Ironically, government intervention with crypto on- and off-ramps actually increases the feedback loop and growth in crypto ecosystems.

When merchants acquire significant amounts of crypto, they can spend it with other merchants who also accept it. Suddenly merchants become customers, and customers become merchants. Perhaps the line between producer and consumer is blurred. Since intermediaries are removed, entire supply chains can be circumvented. This disintermediation process removes excess cost and inefficiencies. Often, crypto transactions have low fees, are not taxed, and remove third parties who only tighten margins. All of these factors add real and tangible value, directly derived from the use of crypto by a widening set.

As a cryptocurrency is more widely accepted, the incentive to sell the coin for fiat is diminished, due to added value in the ecosystem and disincentives to exchange to fiat. When the exchange value of a coin increases, it means increased spending power for coin holders and profits for merchants. Finally, when certain goods and services can only be acquired using a cryptocurrency, demand increases.

And that's why adoption DOES matter.