The Future of Cryptocurrency - Up, Down or Roundabout?
The final instalment of our mini-series on the future of cryptocurrency
Cryptocurrencies seem to be in for an exciting future with 300 million users and a growing sense of popularity. The bankers might be all in a frenzy, but how long can this new revolution last?
The first incarnation of digital currency with barter exchange currencies, followed by e-gold and Beenz, have flowed and ebbed. Digital currency 3.0 led by Bitcoin and blockchain is a way bigger wave. But it might also slow thanks to certain built-in limitations, likely government intervention and the environmental damage from crypto mining. Can crypto-bros sustain the ka-ching of digi-bling?
Will cryptocurrencies last over time?
The leading cryptocurrencies are limited by design. Bitcoin has come a long way since it was created in 2009. What has, however, remained constant is its hard limit, set by its assumed creator, Satoshi Nakamoto. He set the upper limit for Bitcoin at 21 million in the source code, meaning no more Bitcoins over that number can be mined or brought into circulation.
Nakamoto did not give any explanation why this limit, but many see it as a major advantage for the world's oldest cryptocurrency. The limited supply keeps the cryptocurrency scarce and might hold its price steady for years to come. Perhaps, the early founders and investors also recognised that this approach could give them a bigger pop.
Nearly 19 million Bitcoins have been mined so far, meaning nearly 85% of all the Bitcoin that will come into existence have already been minted - leaving a little over 2 million Bitcoins to be un e-earthed.
Some predict that a decade from now, 95% of Bitcoins are likely to have been mined. The remaining will come into existence during the next century with the final Bitcoin appearing around 2140!! The reason behind this slow, steady process of minting is a system called halving. Currently, on average, Bitcoins are introduced at a fixed rate of one block every ten minutes. But halving reduces the number of Bitcoins released by 50% every four years. No one said digital money would be easy!
There are a number of other leading cryptocurrencies with a limited supply including Binance Coin, Cardano, Ripple, Avalanche and Algorand (who comes up with these names?). Cryptocurrencies with limited supply are designed to behave more like gold, meaning they might appreciate over time. Plus, they have the benefit of being ‘virtual’, which means you don’t have to hide them in your vault or stuff them in a Louis Vuitton as you jump on the superyacht to duck the latest sanctions.
But, not all cryptos are made the same and some have unlimited supply. Ether has no cap on the maximum number of its coins. It is categorised as an unlimited supply cryptocurrency - i.e. less ‘gold’ and more ‘Monopoly’. Currencies with unlimited supply are designed to be better for trading or sending abroad. The latter proving to be a nifty feature if you hang out in a country with a democracy rating below one.
Limited supply is not the sole factor compromising the potential life of a cryptocurrency, there is also the longevity of the technology and the team behind the currency business. After all, private currencies are not backed by government, but by individuals that might, or might not develop the best technology and the longest lasting organisation. Right now crypto is hot, but that will not last for ever. Technology, as always, will come and go - and in the end cryptocurrencies are technology plays. Ka-chingtech, but still just technology.
There are 2,000 different cryptocurrencies available - and more coming. Each purports to have a different appeal. But, in all likelihood, a handful will dominate and they will broaden their feature set to squeeze out the smaller players. Already the top 10 cryptocurrencies account for the vast majority of trading.
In the end, though, the longevity of any private currency will be decided by its users. If they are using them for legitimate means, then they will coalesce around the stronger, more stable currencies and ditch the weaker or shadier ones. It’s surely just a question of time before it becomes clear who will be the long term winners. At that point, the future for the lesser players might look a little more bleak.
Government intervention could bring the party down
As the leading cryptocurrency providers become more successful, they are likely to experience growing government intervention. Some believe that the reason the US government shut down e-gold was because it was becoming too popular. The fact that it was used by a number of money launderers and criminals did not help.
Funnily enough political leaders prefer government controlled currency - preferably their own. Central banks are meant to control money and and interest rates. Laws control usage. The public sector controls printing. None of them, as yet, have control over the blockchain.
The idea that some twenty something entrepreneur might own a social media platform is one thing, but managing private money is a whole different game of tennis. Added to that, newfangled terms like crypto mining (implying some hacker dude playing digi-games to dig the stuff up from God only knows where), plus blockchain and distributed finance (DeFi) are bound to lift the hackles on even the hippest slider-wearing politician.
The US and the EU are increasingly making noises about regulating cryptocurrency, and the war between Russia and the Ukraine, with the financial sanctions that it entails, is bound to accelerate this process as Bitcoin and others become mechanisms for Russian and Belarusian individuals to circumvent/dodge certain financial sanctions.
In the end, though, it might be that the strongest form of government intervention will prove to be nation states launching their own digital money. China has taken the lead and their digital yuan is a form of a central bank digital currency (CBDC), which is being developed by many other central banks globally.
China's central bank rolled out the digital yuan, dubbed e-CNY, for Olympians and visitors during the Winter Games. Visitors to the 2022 Beijing Games were able to download a digital yuan wallet app or store the digital money on a physical card. They could also get hold of wristbands, which are swiped to make transactions. So much sexier than your oh-so-yesterday Apple watch. After all, visitors to the Beijing Winter Games were the ultimate exclusive club - or just fit people with a vaccine.
While Beijing has a large lead over many global peers in developing an electronic sovereign currency, it's not a global leader.
That distinction belongs to the Bahamas, which launched the aptly named Sand Dollar in October 2020. Presumably to conjure up the ‘beach’ rather than ‘money disappearing between your fingertips’. The digital version of the Bahamian dollar is issued by the Central Bank of the Bahamas, much like cash and coins, and can be accessed by residents via a mobile app or using a physical payment card.
Apparently the Bahamian central bank expects the virtual currency to increase the efficiency of the country's payments system, bring about greater financial inclusion and help curb money laundering and counterfeiting. Ok?
Last year in October, Nigeria became the first African nation to launch a digital currency — the eNaira.
The virtual currency uses the same blockchain technology as Bitcoin. But unlike the cryptocurrency and its peers, which are decentralised, the eNaira is issued and backed by the Nigerian central bank. The currency is not a financial asset in itself and derives its value from the official fiat currency. Additionally, digital Naira transactions are in principle fully traceable. Cambodia with its Bakong and eastern Caribbean nations with their DCash are also among the frontrunners in the e-currency race.
It looks like a growing roster of countries are working on digital currencies for their people. While these national currencies are different to their private, distributed counterparts, there is no doubt that they could hamper the growth of cryptocurrencies and create an environment where political leaders become ever more interventionist with ‘the cryptocurrency competition’.
The environmental backlash against cryptocurrency
Cryptocurrencies such as Bitcoin use huge amounts of electricity. Even more than my daughter’s confiscated dorm room electric heater. Last year, the Bitcoin network consumed more than the annual energy budget of Finland. And we assume that this particular European nation requires a lot of electric heaters!
Cryptocurrencies run on blockchains which use complex, energy intensive computations called proof-of-work algorithms to keep them secure from fraudsters and hacks. “Miners” solve cryptographic puzzles, competing for the right to verify a new block of transactions. A kind of techno bingo. Successful miners get paid in crypto.
A handful of crypto leaders such as Cardano, Solana and Ethereum have been working on an alternative, greener approach called proof of stake (not ‘steak’ which is less eco), that offers a way to set up a network without requiring as much energy.
Ethereum, the world’s second largest cryptocurrency offers all sorts of other applications, including NFT minting, plans to transition to proof of stake in mid 2022. The shift has been projected to cut energy use by 99.95%. It could give them a considerable edge over other digital currencies in the war for greener purses. It might also make NFT’s ever more popular - assuming that is possible.
The future is digital currency - but will it be crypto-currency?
Third time around and thanks to Web 3.0, the future is going to belong to digital currencies. Governments around the world and their central bankers will make sure of it. The pandemic accelerated the transition away from notes and coins. Digital currency is the next, natural step, and one that many nations are likely to take over the coming years.
It looks like the shift toward government backed digital currencies, the limitations inherent in many of the existing cryptocurrencies, and the impetus behind greener crypto mining means that while the future is bright for digital currencies - it could prove a little less shiny for the current crop of cryptocurrencies. The next decade or two will prove decisive.
There will always be a certain number of people who seek out private currencies and alternative money that operates outside of traditional institutions, and offer seamless, cross-border transactions. But, once crypto values mature and start to flatten out, we will get clearer about how big that niche is. Until then, stay leary while you bling it with Bitcoin!
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