The Triumphal March of Cryptocurrencies
by Eric Sarasin
Five trends over the next twelve months
After the global banking and economic crisis of 2008, economists and central bankers puzzled over the future of our heavily strained financial system and proposed measures to ensure that such a crisis would never happen again. At the same time, others were working on a new currency. This was to function independently of any central bank only peer-to-peer via a completely new technology, the blockchain. Satoshi Nakamoto — a pseudonym of the anonymous inventor of the crypto currency Bitcoin — wrote the so-called “White Paper”, a “manual” on how the crypto currency works. Transfers are recorded cryptographically, hence the name of the first crypto currency Bitcoin.
Bitcoins, of which there are only 17.7 million, can be used as a payment system and as a monetary unit. The underlying technology, blockchain, is a database or a kind of journal that records every transaction. It is stored in a so-called ledger and cannot be manipulated. The security is therefore — relatively speaking — higher than with conventional paper currencies (or FIAT money). During the biggest boom, at the beginning of 2018, the price of a Bitcoin rose to over 20,000 US dollars. Other cryptocurrencies followed, and a veritable “bonanza”, a gold rush for cryptocurrencies broke out. A total of around 1800 were created. With the collapse of the Bitcoin exchange rate, around half of these currencies, which had only been created through speculation, disappeared.
Despite its volatility, the market for crypto currencies has achieved a certain degree of recognition. However, broad acceptance is still lacking. Bitcoin, Ethereum, Ripple and Co. are used too little as currency or programmable money, but rather as storage of value. Yet, their advance is unstoppable.
Investors who are more familiar with crypto currencies should keep an eye on these five trends and developments over the next twelve months:
1. Crypto exchanges
An increasing number of financial institutions have now entered the cryptocurrency space. They now face the challenge of finding out how to hold and secure crypto assets. They also need access to the deposit infrastructure. The planned symbiosis of crypto and traditional banking means in concrete terms: on the one hand, crypto currencies are to become mainstream, on the other hand, the existing gap between crypto currencies and the traditional financial sector is to be bridged. Both private and institutional customers will have access to crypto investments and services, but they need to be able to transfer digital assets back into the traditional financial world at any time. Or the other way around.
2. Bitcoin Mining
In the context of Bitcoin mining, it can be said that mining companies today face two major challenges: more competition and less demand. These companies are now expanding into other areas to remain relevant. In addition, profitable prospecting for Bitcoins is becoming increasingly complex and the mining difficulty will continue to grow. The more computing power Bitcoin mining is provided with, the larger the computing machines are needed, to find Bitcoins. If prices stagnate or rise, mining companies can skim off profits, while if prices fall, the value of the hardware can fall considerably.
3. Blockchain technology
Facebook’s new crypto currency Libra hasn’t really gained momentum yet. This may be mainly due to the fact that every cryptocurrency-related project operating in the US must comply with US regulatory standards. Politicians and central banks also fear that Facebook’s digital currency could interfere with the sovereignty of central banks and that Libra, given the enormous number of Facebook users, could lead to distortions on the money markets. Possible risks with the introduction of crypto currencies such as Libra include gaps in data protection, a lack of investor protection, money laundering and terrorist financing. Libra is currently still at an early stage of development. Not only the company, but also all members of the association hope for a long-term success. Because the more people use Libra, the higher are the investments of the reserve and ergo also interest rates.
5. Experimental trends
“Experimental” trends that are still in their infancy or in the conceptual phase must be carefully observed. For example, “smart contracts”, where contracts can be concluded without intermediaries such as lawyers or brokers. Or decentralized stock exchanges that promise more security in the cyber sector. It’s only a matter of time before a successful decentralized exchange is created somewhere.
As further experimental trends this year, I see stablecoins or stability-optimized crypto currencies, security tokens that are supposed to bring real assets into the blockchain or unique, blockchain-based tokens that differ from each other, as well as data marketplaces that use blockchains to give individuals the opportunity to control and sell their data.