In 2017 the cryptocurrency market has increased seven-fold in value. Surging past the $140 billion mark, industry projections have the sector on course to exceed a value of $5 trillion by the year 2022. This marked upward momentum has been driven largely by the enthusiasm of venture capital investors, eager to claim a stake in the next big thing.
The venture capital investments have been flooding into cryptocurrency via ICO's - Initial Coin Offerings - a fundraising strategy that gives investors the opportunity to buy units of cryptocurrency early doors at pre-launch and low value. The ICO method has proved incredibly successful for some companies. Ethereum's Ether, the second most popular cryptocurrency after Bitcoin, was offered for pre-sale in 2014, and its value has increased two-hundred fold since 2015.
The boom has led to fever pitch hype surrounding the sector, and predictable comparisons with the infamous Dotcom bubble of the late 90's. Speaking at a CNBC conference in September, JP Morgan CEO Jamie Dimon was dismissive and scathing of the recent cryptocurrency gold rush, branding it 'a fraud' and destined to 'blow up'.
Is the cryptocurrency boom just another ephemeral tech bubble certain to burst?
Perhaps. But that doesn't mean it won't produce some enterprises that have a lasting or even revolutionary effect on the way we live our lives. The Dotcom Bubble left many shattered dreams and a trail of failed companies, but its legacy was also the birth of epoch-changing innovators, like Amazon and Google.
Naturally, the institutions who dominate traditional finance have been resistant to the spectre of change. But there are also tenative signs of a gradual acceptance of digital currency among some figures in the banking establishment. During a September WSJ discussion event, Morgan Stanley CEO James Gorman acknowledged cryptocurrency to be 'certainly more than just a fad', while Goldman Sachs is also reported to be developing trading and investment services specifically for cryptocurrencies.
Politically, some governments have begun to endorse digital currencies. In Japan, Earth's third-largest economy, the government is supporting J-Coin, a digital currency that will coexist alongside the Yen and scheduled for launch in time for the 2020 Tokyo Olympics.
Yet there are still deep-rooted problems with cryptocurrency that require remedy before it can truly breakthrough into mainstream usage and become the norm - principally, regulation and security.
It is very difficult to govern cryptocurrency flows at present because of user anonymity - cryptocurrency accounts are not tied to forms of identity used in conventional banking. They are based on numerical ID's, allowing users to stay anonymous and open myriad accounts. Consequently, cryptocurrency is especially vulnerable to capital flight, money laundering, and tax evasion. On a practical level, cryptocurrency is not simple to use - translating cryptocurrency into traditional currency for use outside of the cryptosystem is still a convoluted process.
One person's problem though is another's opportunity, and these defects have left open a large space for innovators. In a Horowitz tech podcast "Why Crypto Tokens Matter", VC investor Chris Dixon, and Coinbase co-founder Fred Ehrsam emphasised the demand for transgressive concepts, imaginative solutions and potential for disruptive enterprises in the cryptocurrency world. Companies such as London based startup Forty Seven Bank, who propose a new type of hybrid bank to bring fiat and cryptocurrency together under one platform, and offer all the services of traditional banking to users of both - current accounts, savings, sale and purchase, investment, trading, futures, and exchange. Central to this hybrid bank concept is a multi-asset account, through which users can access and manage crypto and fiat assets in one place.
Cryptocurrency and the programmability of money also have transformative potential at the micro level, in terms of transactions. Smart Contracts could radically alter the way we are paid, borrow, take out insurance, attract investment and invest. AI enacted contracts could make transactions more efficient, and save money by cutting out middlemen - those financial and legal intermediaries who always take a fee. There is the potential to change almost every sphere of financial activity and service.
So how will the future look in this brave new world of smart contracts, hybrid banking, and computer coded currency?
It is unlikely that private sector digital currencies such as Bitcoin will ever replace central bank issued money. But it is possible that more central banks will create their own digital currencies, just like Japan. After all, as the Harvard economist Kenneth Rogoff commented last week, the history of currency shows that what the private sector creates, the state eventually appropriates. Individual cryptocurrencies will almost certainly rise and fall, and bubbles will burst, but the technology driving them will probably be here to stay.
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