Bitcoin is here to stay.
Not in its current form, sure.
But cryptocurrencies, or digital currencies, have shown remarkable staying power despite epic drops in value. The most recent of which, in recent weeks, wiped out more than $1 trillion (US) in crypto value as part of investors’ journey from all risky assets, including tech stocks.
Most of this loss has been borne by the owners of Bitcoin, the largest of the many thousands of cryptocurrencies.
Crypto needs regulation for what is now an illegal jurisdiction in which users of these digital currencies have virtually no protection from fraud and other losses. The cryptocurrency industry also requires a classic change that results in a few reliable and efficient cryptocurrencies backed by real assets.
This separation of winners and losers is reminiscent of the dot.com craze that spawned so many doomed companies that Pets.com summarized.
But that boom also led to the birth of Amazon.com Inc. , the largest retailer in the western world. And it launched the e-commerce adoption that was already rife before the pandemic fueled the phenomenon.
Excited Bitcoin users and investors know from experience that drops in value were followed by a bounce so strong that record prices were set, or around $68,000 at the peak of last November.
After the last drop, Bitcoin is trading in the $30K range. Even at such a modest price, it was valued at more than nine times its 2018 low of around $3,200.
The belief of crypto-followers is very important in understanding cryptography, which is routinely dismissed as a dangerous part of the financial system due to its volatility and its favored status among criminals.
This belief represents the steady increase in the total crypto value, the number of crypto users, and the increasing diversification of crypto-related investments, including derivatives, exchange-traded funds (ETFs), and crypto-backed mortgages.
At its most recent peak, last year, the total value of cryptocurrencies was estimated to be around $3 trillion, or about 5 percent of the world’s financial assets.
With its increasing importance, cryptocurrencies are gradually being chosen by the traditional financial markets.
This process has been underway since the last decade, when commercial banks and other large financial institutions started adopting blockchain. Blockchain is the system developed along with cryptography to process crypto transactions and store crypto holdings for investors.
Among other advantages, blockchain technology speeds up financial transactions, and is an effective tool for verifying and granting asset ownership.
Now, there is a rush by traditional financiers to buy the cryptocurrency itself.
During the recent swooning for cryptocurrencies, US mutual fund giant Fidelity Investments said last month that it would enable 23,000 of its employer clients to include bitcoin holdings in employee 401(k) retirement plans, a US counterpart to Canadian remittance service providers.
This month, Goldman Sachs Group Inc. , a major US investment bank, and Barclays PLC, one of the UK’s leading commercial banks, are among the excellent investors in a four-year-old crypto investment platform, or exchange, called Elwood Technologies LLP.
Back in 2018, during the deepest plunge in cryptocurrency, Warren Buffett said that cryptocurrency “may be a rat poison square.”
But in February, Buffett’s subsidiary, Berkshire Hathaway Inc, revealed that it had bought $1 billion worth of stock in Nu Holdings Ltd. , a Brazilian online bank that enables 50 million customers to trade cryptocurrency.
As mentioned earlier, there are no rules for crypto activity.
At this point, it appears that these rules likely come from central banks, with more than 100 of them, including the Bank of Canada, developing their own cryptocurrencies.
However, so far, all but a few central banks have stopped launching cryptocurrencies, and they are still not sure that the cryptocurrency will meet the needs of the market.
However, the rapid growth of crypto-assets in just 13 years of existence – the total value of cryptocurrencies now pegged at around $1 trillion after the recent downturn – proves that the cryptocurrency caters to a large market.
This is notably the case in “bank-deficient” areas such as those served by Nu Holdings. It also includes disadvantaged areas of Canadian cities.
If history is any guide, the total value of cryptocurrencies will once again cross their all-time high. This calls for urgency in bringing cryptocurrencies out of the cold.
A recent Bloomberg editorial warns, “The more crypto grows — the more it permeates the financial system and attracts leveraged investors, the higher the chances that the next (crypto) path will lead to a contagion.”
In other words, cryptocurrency could grow large enough to put the entire financial system at risk.
Which means that the central banks will soon face a difficult decision.
Are they trying to beat the current crypto with their own new cryptocurrency? This could risk pushing non-state cryptocurrencies into the shadows beyond the reach of regulators.
Or are central banks designing their new cryptocurrencies to coexist with a few reputable independent cryptocurrencies with international reach, regulatory compliance, and compliance with central bank cryptocurrencies?
Either way, crypto is part of the future of our cashless society. By the end of the decade, they’ll be as familiar as Visa and Mastercard today.