If an army of optimistic investors is to be believed, then cryptocurrencies are set to take over the world.
It’s been 10 years since the mysterious figure called Satoshi Nakamoto published a paper laying out the concept of bitcoin, the world’s first “peer-to-peer electronic cash system.” The idea was to delink currency-based transactions from government control and third-party management — to create a means of “removing friction from the world,” in the words of Alon Goren, co-founder of the investment fund Goren Holm Ventures.
Still the dominant cryptocurrency in terms of value, bitcoin has been followed by a tidal wave of imitators. Today there are approximately 2,480 cryptocurrencies on the market, representing a total market capitalization of more than $212bn.
You might think of that bonanza as a sign of broad acceptance of the concept. But consider this: in March of this year, there were only 1,658 cryptocurrencies in existence, yet their market cap was significantly higher than today, at $369bn.
In fact, the value of any cryptocurrency swings wildly from day to day. Six months ago, a single bitcoin was worth around $10,000. Now it’s about $6,400. And that’s for the world’s leading cryptocurrency. Most of the “coins” on the market today are worth far less; the top 20 reportedly account for nearly 90 percent of total value.
None of this has stopped true believers from investing and doubling down on their positions in bitcoin and other cryptocurrencies. This October, they came together at the Crypto Invest Summit in Los Angeles to spread their particular gospel.
They didn’t hedge their predictions. “In 10 years,” declared Goren, “there will be more digital currency than fiat,” the latter defined as currency backed by the government that issued it, and not linked to a physical commodity such as gold.
One could argue that fiat currencies are no less a fiction than their crypto equivalent. It’s merely a matter of convincing enough people to agree on the value of a given instrument. To date, however, cryptocurrencies have proved to be extremely shaky bets.
Security is also an unresolved issue. Recently cyber thieves hacked the Japan-based exchange Zaif, stealing some $60m worth of cryptocurrency, including 5,966 bitcoins. It was just the latest in a series of thefts, totaling $1.1bn in the first half of 2018 alone.
Then there’s the taint of illicit activity that bitcoin has struggled to erase. Among its early uses was for the purchase of narcotics and other illicit items on exchanges such as the now-shuttered Silk Road. Today, bitcoin and other cryptocurrencies are touted as alternative forms of payment for just about any legal item. (In 2010, 10,000 bitcoins bought two Papa John’s pizzas; the currency today is worth more than $64m.) Bitcoin also gave birth to the blockchain, a ledger of business transactions distributed among multiple computers, with strong applicability to global supply chains.
Additional criticisms of cryptocurrencies address difficulties in scaling, delays in posting transactions on the blockchain, and high transaction fees. No wonder that cryptos to date have served as more of an investment vehicle for speculators than an everyday means of purchasing goods and services.
Some supporters might be enticed by what Goren called “the shiny object syndrome.” Still, he believes that the future of crypto is bright beyond its surface glint.
A year from now, he told an audience at the Crypto Invest Summit, “there will be three apps that are on the home screen of your phone that use cryptocurrency and the blockchain, and you won’t think about it.”
Celebrity speaker Steve Wozniak, co-founder of Apple, likened the current status of cryptocurrency and blockchain to the early days of personal computers. “There’s no control anywhere,” he said, noting that Hewlett-Packard, where he worked prior to starting Apple with Steve Jobs, turned down his proposal to build a desktop computer five times.
“Eventually it boils down to what works,” Wozniak said. “People can’t change quickly to accept things they don’t understand fully.”
Acceptance by the public requires that it believes crypto coins or tokens to be as secure as traditional currencies. But there’s also a broader education that has to take place. Goren stressed the importance of spreading “crypto literacy” — “getting people to know what it is.”
The problem: “What it is” remains to be fully determined. “I don’t think we know what ‘good’ is yet, what a great crypto product is,” acknowledged Goren. The same goes for blockchain: what types of companies and industries are best suited for use of the technology? Where is it not applicable?
Much more clarity is needed before cryptocurrencies gain a foothold in global economies. Still to be fully defined is the distinction between “security” and “utility” tokens — the former qualifying as assed-based investment vehicles and therefore falling under the jurisdiction of the U.S. Securities and Exchange Commission, and the latter giving holders future access to products or services. For its part, SEC has been insisting that just about all of the recent initial coin offerings (ICOs) and crypto exchanges are subject to securities laws.
Michael Graham, managing director of Canaccord Genuity, said security tokens have yet to penetrate all of the investor classes, from large institutions to family offices. “The big ones don’t have that appreciation for bitcoin yet, but I think they will,” he said.
“On securities tokens, there are definitely pockets of interest,” Graham added, “but it’s fairly limited.”
None of which stopped thousands of hopeful and would-be investors, along with vendors looking to cash in on the craze, from descending on the Los Angeles Convention Center — not the booths selling a “crypto poker exchange,” “crypto inspired jewelry,” celebrity-branded coins, crypto derivatives and applications for addiction healthcare, to name but a few.
Even the most ardent believers expect a large percentage of the cryptocurrencies now being offered to crash and burn. But they’re convinced that the strongest will survive and flourish.
Bill Barhydt, chief executive officer of Abra, creator of an app for managing crypto investments, predicted that bitcoin will become to banking what the TCP/IP protocol is to the internet. “You won’t even know it’s involved,” he said. “Nobody will have to understand how complex it is.”