Eoin Duffy examines the question plaguing the minds of many, “What is a Cryptocurrency?”
Following recent reports concerning Goldman Sachs’ possible introduction of new Bitcoin operations within their organisation, the debate surrounding the benefits of cryptocurrencies is more relevant than ever. In the financial world, there is no single more divisive topic than that of cryptocurrencies. Wherever you ask, you are likely to receive a different response.
To some, the likes of Bitcoin, Litecoin and Ethereum propose the future of the financial system, whereas to others the whole market is merely a bubble waiting to burst. For us to indeed realise a potential future with cryptocurrencies, it is imperative that we fully understand them. Unfortunately, this is where the problem begins.
Despite their continuous dramatic rise in prices, the financial sector has yet to find a sustainable use for either Bitcoin or other similar cryptocurrencies.
While mined coins possess some attributes of a currency, can they really be trusted as a valid means of exchange? Although cryptocurrencies are legal in most countries, there are some notable exceptions. For instance, China has banned financial institutions from handling bitcoins, while Russia has made it illegal to buy goods with any currency other than Russian rubles.
Examples such as these prove that cryptocurrencies are not free from restrictions and perhaps even more susceptible to intense regulations than an average currency might avoid. In addition, the decentralised nature of a cryptocurrency further distances itself from that of a standard currency. While the Euro, U.S dollar, and British pound are all issued by central banks, the likes of Bitcoin are produced by independent computers around the world.
So, if not a viable currency, can we deduce that it is a commodity? Let us take a look at Bitcoin in this case. Since there shall never be more than 21 million coins in circulation, it matches the definition of a commodity in one sense, due to its existence as a limited resource. Furthermore, the extreme volatility of the cryptocurrency market lines up with the historical nature of commodities, whose prices are widely known to fluctuate more than other major asset classes.
However, its distinct differences with traditional commodities such as gold and oil beg the question of its legitimacy to be coined under the same term. The sheer fact of its digital existence contrasts significantly with the physical nature of the commodities we are used to discussing, which makes it hard to class them as the same definitively.
The dotcom and housing booms both offered the illusions of easy returns, which is admittedly quite similar to the current state of the cryptocurrency market.
Is the cryptocurrency market merely a bubble? Some point to the fact that the price of Bitcoin has risen from around $1,000 towards $6,000 in this year alone, claiming an abnormal volatility synonymous with previous markets that devastatingly crashed. The dotcom and housing booms both offered the illusions of easy returns, which is admittedly quite similar to the current state of the cryptocurrency market.
Despite all of this, there have still been signs pointing to cryptocurrencies as the potential future of the financial system. The growth and successful implementation of various Initial Coin Offerings (ICO) over the past year have identified a new and innovative way for firms to raise funding by offering digital currencies.
With well over $1 billion raised so far this year through ICOs, it has overtaken seed and angel funding as the method used most by fledgeling tech companies, with no signs of slowing down. As well as this, pioneers of the cause also laud the fact of its decentralised nature. They propose it as a means of avoiding identity theft, due to the fact that senders of money can choose which information (if any at all) to disclose when making online payments. Similarly, by discarding the use of third parties in making transactions, cryptocurrency exchanges are mostly free from various rates and fees that we currently find ourselves exposed to when transferring money.
With a current total market capitalisation of over $168 billion U.S dollars, cryptocurrencies are becoming increasingly hard to ignore for financial institutions such as Goldman Sachs.
With such confusion surrounding cryptocurrencies, it is no wonder that the benefit of their existence is disputed. However, as we have seen, advantages to their use do in fact exist and are there to be exploited. With a current total market capitalisation of over $168 billion U.S dollars, cryptocurrencies are becoming increasingly hard to ignore for financial institutions such as Goldman Sachs.
However, before any potential introduction, the financial industry must ensure there is a better universal understanding of them. They cannot expect a successful implementation amongst the current confusion. History has taught us not to trust unfamiliar markets, for as we know, the failure to identify a bubble can have disastrous consequences.