Cryptocurrency – time for a rocket launch or a giant bubble burst?

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Since the publication of Satoshi Nakamoto’s white paper, Bitcoin: A Peer-to-Peer Electronic Cash System in 2008, cryptocurrency led by Bitcoin, has been on a rollercoaster journey of discovery and legitimacy.

CryptocurrencyBut, with ‘Altcoins’ now joining Bitcoin in the hundreds, this $400 billion asset class is now being taken seriously by the financial establishment as a potential disruptor to the status quo. So, is now the time for digital money to rise or will it will it continue its tortured existence somewhere between a ‘bubble’ waiting to burst and a rocket waiting to launch?

What is cryptocurrency?

Cryptocurrency is a digital asset provided as an incentive to secure and maintain Blockchain networks. This in itself is something of a revolution as it was initially designed as an experiment in decentralized currency, using Blockchain to store the data and cryptography as the means to solve the double spending issue.

As a digital asset, cryptocurrencies have a total market value (according to CoinMarketCap) of $400 billion, but it is yet to win over a true asset class title as it falls somewhere between a currency and a commodity. It is instead referred to just as “crypto.”

There are hundreds of different digital assets running on as many Blockchain networks, with each network trying to fill a commercial space and vying for legitimacy and supremacy. Blockchain (described in this previous blog, “6 business benefits of Blockchain”) has matured faster than its crypto parent and is now enjoying multiple commercial use cases, awaiting its master to catch up.

What benefits can crypto bring?

1. Because of the decentralized nature of crypto and its digital medium, it can provide currency transfer and exchange at a much higher speed than traditional fiat currency and at a fraction of the cost, as described by the Ripple network.

2. It needs no bank or financial institutions to exist, meaning that the 2 billion people currently without access to banking (according to this World Bank report) can be paid in, own and trade digital currency.

3. It is currently a store of value, which is why Bitcoin is often referred to as digital gold, and with an increase in value of %100s or %1,000s, it is also a speculative trading asset.

4. It provides incentives for Blockchain miners to continue to verify the legitimacy of new blocks, and by doing so keeps the blockchain running.

5. It can provide the immediate settlement of smart contracts on a Blockchain to further enhance the speed and cost of smart contracting, as described in this short video.

6. Once retail outlets accept digital currency as settlement, cryptocurrency could replace fiat currency entirely.

What are the technical challenges?

Each digital coin is affiliated with a separate Blockchain network, and the network is the differentiating factor between the coins (other than the marketing behind them). Some Blockchains are built for speed and scalability in the consumer-to-consumer or business-to-consumer space, whereas others focus more on bridging currency exchanges across borders. Some major on security, smart contracts or are niche players, either in branding or operation, and some are just happy to be a store of value.

All the coins and their corresponding Blockchains that wish to be more than just a store of value still suffer from the same three technical issues:

1. Scalability: The ability to handle huge numbers of transactions per second

2. Volatility: The price volatility of the coin creates issues with currency storage and value inflation

3. Liquidity: Trading currencies requires a large amount of cash to bridge the transactions

What are the economic challenges?

If the currencies could overcome the three main technical issues and become a genuine rival for fiat currency, then macroeconomics, banking and taxation would have to significantly change as the power to use macroeconomic levers would no longer be centralized.

On the macroeconomic side, the loss of a nation’s currency coincides with the removal of much monetary policy power and decision making from the government of that nation.

Referring to the banking industry, if digital coins (as now) can be held in digital wallets and transacted with globally, then this traditional banking role will be lost by the banks and placed in the hands of the Blockchain networks that operate the coins and the coin trading marketplaces.

For taxation, there would need to be a serious rethink of how and where transactions should be taxed (a central operation) from a virtual exchange in a decentralized network.

Why now?

2018 will be 10 years since the launch of the white paper and the birth of cryptocurrency and Blockchain. The anniversary will not go unnoticed by the growing fans of the digital asset dream.

With the market capitalization growing past $400 billion, it is a wakeup call to the establishment who up until now have called it nothing more than a fad by technical geeks.

The narrowing of the gap for the completion of the technical challenges has been significant on some networks, with joint business to crypto network projects already gaining traction.

Cryptocurrency has been gaining in popularity as the headlines keep coming on the astronomical growth in the price of certain coins, but while that is important for market sizing, it the closure of the technical gaps which will turn that price into value.

With certain exchanges forced to close during 2017, if there were acceptable regulation in these countries, they would open up once again.

In summary…

It may have started as a response to the financial crises, with the belief that there was a better, fairer way to manage the world’s assets than traditional banking, but cryptocurrency has birthed the phenomenon of Blockchain, and if current work on closing the technical challenges continues at a pace alongside the business community, then crypto will find its place as a global currency and a store of value.

The rocket may be fueled and ready, but without further technical progress, it may prove to be a giant balloon with the banks and governments ready and waiting with the pins to burst it.

I welcome comments on this or any other topic concerning finance, HCM, CSR and business strategy. Connect, discuss, and explore using any of the following means:

Twitter: @stevetreagust

Email: steve.treagust@ifsworld.com

Blog: http://blog.ifsworld.com/author/steve-treagust

LinkedIn: https://www.linkedin.com/in/stevetreagust


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