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Could We Soon See the Demise of Cryptocurrencies as We Know Them Today?

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Cryptocurrencies are really a tiny part of the global market. But it’s an asset class that investors can no longer ignore. While most retail trades are speculative, there are a number of institutional investors that subscribe to the base ideology of cryptos.

Market Commentary

By Andrew Lane | June 24, 2021

Nonetheless, the phenomenal growth in cryptos has come against the backdrop of a death knell, sounded by market observers, professional investors, and even renowned economists. This knell has echoed in the crypto sphere since bitcoin began to gain traction, experts having declared this digital currency as dead or dying over 400 times. However, these obituaries slowed in 2020, as bitcoin attracted more institutional investment during a period of record-low yields and record-high money supply in the most influential economies. The crypto market as a whole saw a 300% spike in market cap in 2020. Even Nobel Prize-winning economist and crypto-sceptic Paul Krugman admitted that he’d given up predicting bitcoin’s demise. True to his view, he qualified his statement by likening BTC investors to a cult that is likely to continue indefinitely. This may have resulted from internet hyperbolics rather than sound investment thesis, but it is worth examining the forces at work around the bitcoin-dominated crypto environment. Will the era of cryptos herald a new way of thinking about money or will it be a slice of history placed on the shelves beside the US free banking era?

Utility

The crypto world is not just about non-centralised currencies. Instead, these currencies facilitate a wide range of utilities. Notwithstanding their lure as capital investments to institutions in the current loose monetary policy environment, cryptos have also demonstrated the ability to find and address institutional gaps in the financial and business systems.

In the international remittance space, they attempt to replace banks, clearing houses and other middlemen by providing a peer-to-peer authenticated and enforced transfer mechanism. The rise of ICOs (initial coin offerings) in 2018 and 2019 exhibited the potential of cryptos to fast-track ideas into operational businesses and revolutionised funding for small businesses. In the art world, NFTs are facilitating authenticity certifications as well as redefining collectables. DeFi tokens exhibit the potential for financial transactions of the future, using smart contracts to remove middlemen in lending, investing and liquidity pooling agreements. While cryptos are not yet threatening the role of existing market intermediaries and systems, they are, at the very least, proofs of how blockchain can transform some of these systems.

Threats

Crypto transactions are still an exceedingly small portion of total remittances. The bitcoin and Ethereum blockchain process 7 and 15 transactions per second (tps), respectively. To understand how these big crypto names are eclipsed by the scales of existing payment houses, let’s have a look at Visa, which processes about 1,700 tps on average and has a capacity of 24,000 tps.

Ethereum is addressing the scalability of its network by introducing a split blockchain called “sharding”. Other cryptos, such as Ripple, offer a comparative transaction speed on Visa’s average figure with 1,500tps. These altcoin projects show a route to where current or upcoming cryptos can rival Visa et al.

A strong headwind for the crypto market, most notably bitcoin, can be the increased recognition of its energy usage. Bitcoin has a large carbon footprint, with only 39% of mining energy currently drawn from carbon-neutral sources.

This may be part of the reason that investor sentiment for Bitcoin is much weaker than for Bitcoin Cash, which uses far less energy. This can be seen on the Acuity Trading Dashboard.

Yes, we’re all talking about bitcoin’s energy mix. However, this mix is far better than the US electricity grid and is only expected to improve as significant mining economies like China and the US transition to greener sources.

We should also note the emergence of lower emission coins like the Elon Musk propped Dogecoin. However, the way forward might be through technological changes such as Ethereum’s new proof of stake model that is estimated to exponentially reduce the reliance of mining on computing power and energy.

The most significant threat to the crypto world remains government action. Governments and their central banks rightly see cryptos as a threat to their monetary and regulatory powers.

Sources of Harmony

Many of the world’s central banks have had their interests peaked by Central Bank Digital Currencies (CBDC), which can help address policy goals and provide transactional ease. China has already rolled out its Digital Yuan to 20 million citizens. CBDCs provide private citizens with an account at central banks, a feature previously only offered to banks. This also opens a new arena of crypto utility.

Conclusion

Will investors be spooked by regulatory threats, energy usage, and transactional risks? Going by how larger companies are investing in cryptos, that seems highly unlikely. Traders have also found other routes like CFDs (contract for differences) to gain exposure to cryptos. Meanwhile, new and more innovative cryptos are entering the space, addressing the above risk factors through technological advancements. Some cryptos could even position themselves alongside CBDCs to help facilitate central bank policy, although some investors see these digital coins as a hedge against central bank actions.

The future of the crypto sphere is likely to be less dominated by bitcoin as it is today. The space is still nascent, just over a decade old, and has already seen considerable technological innovation. Cryptos have the potential to co-exist as a shadow banking system.

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