Is there a Future for Cryptocurrencies?

The theory of cryptocurrency started back in 1983, when an American cryptographer, David Chaum, created an anonymous cryptographic electronic money called e-Cash. David’s initiative was enormous, which later expanded its popularity around the world and made it a stable Internet-based financial exchange medium.

Cryptocurrency also gave birth to Blockchain technology that is decentralized in nature and has made cryptocurrency effective for businesses looking for the best ways to control and interfere with transactions. The cryptocurrency age is going prolifically, enabling companies with a competent and safe transaction environment.

Cryptocurrencies have come a long way since the first bitcoins were used to purchase a couple of pizzas. A few holders (HODLers) who kept their faith got rewarded manifold. Now they own best cars, palatial homes, and businesses worth millions and some, billions in market capitalization.

If the end of 2017 taught us anything, it’s that the demand for cryptocurrencies is skyrocketing and every accountant, mechanic, forex mogul and the average john does and janes are all looking to get a bite of this cake. The massive following these digital assets have attracted has led to wall street diehards describing them as a bubble.

In December 2017, bitcoin broke the charts by trading at a whopping $20k becoming more precious than exchange-traded funds (etfs) and instruments. Forex markets were shaken as many day traders shifted their attention towards these fledgling but profitable currencies. Bitcoin wasn’t the only one minting profits; most other crypto projects set their new records as well. The market cap of all cryptos was nearing one trillion.

But the following year was disastrous for crypto market. The prices of one Bitcoin fell from $20,000, at the turn of the year, to almost $6,000 in June. The $600 Million volume of BTC market fell to $224 Million in a span of 6 months. So, the fact remains, it is extremely difficult to predict the future of Bitcoins or any other cryptocurrency. Hence, the following article is based on the factors that will contribute to the future of cryptocurrencies.

Impact of Digital Currency Revolution

The digital currency revolution will have a lot of impact on the digital and physical world.A lot of devices will be connected to each other via near-field communication (NFC).Devices that are carried by our side or are worn on our body will contain informationabout our preferences, possibly our current state of health and most likely all our personalrecords including how much money we have. We may not need to carry physical walletsand identity cards anymore.

These devices will monitor us and improve our experience in every aspect of our lifeincluding medical care, education, and financial services. The blockchain technology canplay a major role in lowering the cost of financial services via cost sharing through mining,and therefore, financial institutions can reach out to the unbanked and underbanked,as well as those that require lending and fund raising. All these can be done via the peer-to-peer network of cryptocurrency, either decentralized or distributed. Financial servicesespecially banking will likely be disrupted and margin will be affected as what e-Cash wasset out to do in the early 1990s.

A second example is the use of smart contract for a sharing economy. We will be ableto share our assets such as cars, hard disks, and computer memory that we do not use andrent them out to others for a fee. Smart contracts via the distributed peer-to-peer networkwill make all these possible in the future. This will ensure that infrastructure need notincrease but excess capacity is used efficiently.

The desire to own entire assets will be less as more peer-to-peer digital assets or digitaltrusts can be held by the crowd via blockchain technology. There is also the possibility oftime banking so that the cryptocurrency is stored in hours of work. One can then tradewith the time spent in, say, palliative care when one is young, and then, the same personwill be entitled to such care when he or she gets older with the hours that have beendeposited. While these can be done with a centralized system, a distributed or decentralizedblockchain system has unique advantages especially in terms of distributed computing.

Cryptocurrency may not replace the fiat currency, but its blockchain technology willcertainly have an impact on the welfare of the people and perhaps even out the inequality.

Many people see similarities between the growth of the Internet and the growth of cryptocurrencyand postulate that cryptocurrency is going to see exponential growth like theInternet. However, from the business perspective, the growth of the Internet has more todo with e-commerce and less to do with finance. On the other hand, with cryptocurrency,for once in the history of mankind, technology is playing a leading role in finance.In future, one should expect a bank to be a digital or technologically savvy bank. Thedisruptive force has now arrived at the door step of finance and the blockchain technologyis one of the solutions.

There are also similarities between hedge funds and cryptocurrency at the industrylevel. When the hedge fund industry was in its infant stage, it was perceived to be disruptiveto the currency system because hedge fund managers were perceived as the badguys who took big bets. They were seen to be the mavericks who attacked the currencysystem and caused the stock markets to collapse. Some banks did not want to deal withthem as it did not make business sense with the high compliance costs. Start-ups in cryptocurrencytoday face the same problems.

There is a lot of bad press and misunderstanding in the media regarding cryptocurrencyand some banks are unwilling to open accounts with cryptocurrency start-upsbecause of various reasons. Regulators are also generally uncomfortable at the momentto deal with a financial innovation as complex as Bitcoin or indeed any other cryptocurrency.

At the same time, there is a general resistance and reluctance by Main Street tolearn about the intricacies of this financial innovation—it is a wait-and-see situation. Thatis human nature and it is always the universities and those who are interested in the technologywho will see the opportunities first.

There are a lot of similarities between cryptocurrency and hedge fund strategies thatwere inherently quantitative and difficult to understand. It was no surprise to anyonethat hedge fund strategies were initially embraced by the university endowment fundsthat were less constrained than the traditional managers. Again, universities and financialentrepreneurs will be the first to embrace the cryptocurrency technology before it spillsover to the main street.

Cryptocurrency is here to stay and will evolve over time. If Bitcoin loses its popularityfor whatever reason, a new cryptocurrency will emerge to replace it with better features.Countries with huge debts have the incentive to create their own cryptocurrency andthose who wish to promote financial integration may also turn to cryptocurrency, simplybecause the cost is low in creating a decentralized partially distributed system. There willbe welfare improvement in a cryptocurrency world, which is decentralized but not necessaryfully distributed, with proof of identity, proof of stake, and the flexibility to incorporatesmart contracts for a sharing economy.

Eventually, it is about reduction of business cost, and welfare improvement will followfor those at the bottom of the wealth pyramid. Eventually, all of this will lead toenhanced efficiency in a sharing economy. The outlook on the development of cryptocurrencyis much more optimistic because of the blockchain technology. We are likely tosee a great leap in its use, with NFC and related mobile technology being the driverbehind its boom. At the same time, it is difficult to predict if cryptocurrency is the nextbig thing as there is still a lot of uncertainty in the cryptocurrency world. But it is a technology that financial institutions cannot ignore. In conclusion, Bitcoin is a novel invention, which is a breakthrough in terms of thepayments and decentralized networks we know today. It brings with its various benefitsand risks that users should be cognizant and indeed conversant with should they wish todeal with and in bitcoins. This chapter has mainly discussed the main features of Bitcoin,but other cryptocurrencies are likely to have similar features and a clear understanding ofBitcoin will aid in understanding other cryptocurrencies. It is only with a good foundationin the knowledge of this amazing new technology that we will be able to use it to itsfullest potential without fear.

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