Everything started with bitcoin back in 2009, a digital currency – now digital asset – built on blockchain technology, to be used for peer-to-peer transactions without having to trust a third party like a central bank.
Early adopters of the digital currency made millions due to high fluctuations in value, the price reached a peak of $19.783 (around €16.17) per bitcoin in late-2017. Critics called it a price bubble, many of whom made comparison to the Dutch Tulipmania of the 17th century. As a result, buying, trading, and selling bitcoin became a trend despite price volatility, new cryptocurrencies came into reality (Litecoin in 2011, Ripple in 2012, Ethereum in 2015), and digital exchange platforms for crypto trading were created all over the world – and all of this ‘unregulated’, can you believe it?
The digital revolution of money was paving its way to success. Eleven years after, the number and popularity of cryptocurrencies has grown exponentially. There are over 2000 cryptocurrencies listed, which have become progressively embraced by speculative investors. Plus, companies and central banks have adopted their own digital currency, and market adoption is huge, leading to a radical departure from the traditional model of ‘monetary exchange’.
What is behind this success?
Cryptocurrencies’ increased popularity results from the shortcomings of the existing financial systems; in the aftermath of the financial crisis, we see an increasing interest in new ways of efficiently executing transactions, while ensuring high levels of transparency and accountability.
At the heart of cryptocurrencies is a rich history of innovation, disrupting the future of finance and the monetary system. The biggest driver is that the cost of financial transactions using cryptocurrencies are significantly lower than transactions costs in the traditional economy.
The advent of cryptocurrencies will surely reshape the nature of currency competition, the architecture of the international monetary system, and the role of government-issued public money.
What does the future look like?
Success will mostly depend on 4 conditions: appropriate technology, consumer demand, corporate champions, and amenable regulatory environment.
The adoption by a wider public and widespread acceptance by consumers as a viable form of money is a key point, which will mean overcoming the practical technical and regulatory challenges along with the lack of trust in issuing authorities and understanding how to use them. Their relative complexity compared to conventional currencies will likely deter most people, except for the technologically adept.
Cryptocurrencies are still seen as a highly speculative form of investment not suited for all individuals. Its future success (or lack thereof) will depend on the ability to deal with issues such as the fact that there is no central authority to ensure things will run smoothly, or to back the value of bitcoin and other cryptocurrencies. Value fluctuation and volatility are a main challenge for the adoption in the digital payment industry. Many people fail to understand the real value of cryptocurrency, because they’re only focused on speculative trading, driven by price and volatility. Moreover, some countries do not consider it legit, due to the lack of transparency, which raises the chances of tax evasion and money laundering.
A cryptocurrency that aspires to become part of the mainstream financial system may have to satisfy a quite formidable criterion: it will need to preserve user anonymity without being a conduit for tax evasion, or money laundering, be technically complex to avoid fraud and hacker attacks, but easy for consumers to understand, as well as be decentralized but with adequate consumer safeguards and protection. Quite a challenge.
Looking at the different sectors, in the future, trading and e-commerce and retail segments are expected to hold a major market share when it comes to cryptocurrencies. The penetration of digital currencies in digital payments is expected to affect the cross-border transfers, and digital currencies have the potential to become the main vehicle for e-payment if not the only one. This will make digital payment services – powered by blockchain technology – the next great upheaval in global e-commerce growth. Financial institutions are also directed to blockchain technologies, which is expected to drive the market in upcoming years. The financial ecosystem will likely undergo massive disruption.
Will crypto ever replace fiat money in the future?
Despite this, there is one big uncertain factor, and that is how will governments approach cryptocurrencies? In other words – will crypto ever replace fiat money in the future?
Governments will not sit and lose control of the money supply without fighting. In fact, more than 20 countries have started exploring the concept of Central Bank Currencies (CBDC´s).
The first step is that cryptocurrencies must become legitimate in the eyes of governments and regulators. This requires policymakers to come up with the proper framework for cryptocurrencies to be legit. In this sense, governments have started drawing up regulations to provide a legally compliant environment for trading and investing in cryptocurrencies. Get ready to see, therefore, countries drafting regulations pertaining to the use, trade, and storage of digital currencies.
As regulatory hurdles are surmounted, cryptocurrencies may become legitimate substitutes of fiat money, for some, This could mean widespread adoption of stable coins (which are cryptocurrencies pegged to the value of a fiat currency, for instance USD), with a strong oversight of regulators. For others, the real victim of crypto will not be fiat money but credit cards.
Predictions are tricky. Changes take time. Crypto can be good and evil. Cryptocurrencies empower people to be their own bank and payment method, moving away from the traditional monetary exchange system, and place at stake the financial hegemony of banks. One of the downsides is the risk of cybercrime or cyberattacks against investor protection and security.
We should expect cryptocurrency mainstream adoption, to the extent that there is a focus not solely on popularity due to speculation and digitalization trends, but in overcoming the current challenges without eroding the fundamental premises of their existence.
Once fully integrated in our lives, cryptocurrencies will make the world look quite different, in ways we can only begin to understand.
Curious to read more? Check out some of our interviews with crypto founders, read our piece about the EU’s digital currency, or try our sourcing service if you’re looking to partner/invest in upcoming cryptocurrency startups.