4 reasons cryptocurrency is likely to be ‘the future of money’
Tuesday’s SEC decision to postpone a ruling on whether to approve the SolidX
Bitcoin Shares ETF for trading on The Chicago Board Options Exchange is
a good sign. Given previous SEC statements, the postponement appears to
suggest that the U.S. regulatory agency wants to issue a
well-thought-out approval ruling that protects cryptocurrency investors
and nurtures innovators. I
agree with the CBOE that "investors are better served by products
traded on a regulated securities market and protected by robust
securities laws.” And
I
would rather see the SEC make a methodical decision to approve a
cryptocurrency ETF, with thoughtful guidelines than a rash decision to
reject one.
Bitcoin’s Challenges and Promise
Since
2010, when it emerged as the first legitimate cryptocurrency, Bitcoin
has been declared “dead” by pundits over 300 times. Critics have cited
the cryptocurrency’s hair-raising price volatility; it’s scalability challenges, to handle a large
volume of transactions as a payment method, or the improbability of a
central bank ceding monetary control to a piece of pre-set software
code. T
he
adoption of Bitcoin as an alternative to transacting by credit card or
other payment methods is rising. After its release as open-source
software in 2009, Bitcoin alone has facilitated over 300 million digital
transactions, while hundreds of other cryptocurrencies have emerged,
promising to disrupt a host of industries.
Granted,
no more than 3.5% of households worldwide have adopted cryptocurrency
as a payment method. But as developers and regulators resolve the
following key issues, global cryptocurrency adoption will likely grow --
both as a consumer payment method, and through business-to-business
integration, streamlining a variety of operations in the private and
public sectors. The prospect of more widespread adoption explains why I
think cryptocurrencies may continue to outperform other investment
assets in the long term and improve how the world does business.
Four Key Reasons Why Cryptocurrency is Here to Stay:
1. An SEC-Approved Bitcoin ETF Can Boost Liquidity, Protect Consumers, and Nurture Innovators
Though the SEC may not reach a final decision until next year on the
proposed listing of SolidX Bitcoin Shares ETF, I think the agency will
eventually approve what many experts say represents the best proposal
for a cryptocurrency ETF.
The proposal -- which requires a minimum investment of 25 Bitcoins, or USD 165,000 assuming a Bitcoin price of $6,500 -- seems to meet the SEC's criteria on valuation, liquidity, fraud protection/custody, and potential manipulation.
By boosting institutional investment, SEC approval would represent another milestone in the validation of cryptocurrencies. To reiterate,
rising adoption could benefit the U.S. financial system and other
financial systems worldwide, because cryptocurrency promises to create
significant financial savings and societal benefits -- by streamlining
how the world transacts for goods and services, updates mutual ledgers,
executes contracts, and accesses records.
2. Comprehensive U.S. Regulation Can Improve Protection, Innovation, and Investment
Beyond
a potential Bitcoin ETF, demand is mounting for a comprehensive
regulatory framework that protects consumers while nurturing innovation.
Because the dollar remains the leading global fiat currency,
institutional investors across the globe are especially watching for
what framework of rules and policing U.S.
regulators develop. Although many institutional investors are assessing
the risk/reward proposition of cryptocurrency investments, that doesn’t
mean they’re ready to invest. Many such endowments, pension funds, and
corporate investors are awaiting U.S. regulatory guidance and
protections to
honor their fiduciary duties. How, if at all, for example, will exchanges be required to implement systems and procedures to prevent hacks and otherwise protect or compensate investors from cyber attacks?
Though
there’s mounting pressure on regulators to act, cryptocurrency
regulation that both protects consumers and nurtures innovation requires
a nuanced set of rules, a sophisticated arsenal of policing tools,
sound protocols, and well-trained professionals. Developing such a
unique strategy takes time, and may involve some
stumbles. But I think U.S. regulators will eventually succeed in
developing a comprehensive and balanced regulatory framework for cryptocurrency.
If institutions become more confident that regulations can help them
meet their fiduciary duties, even small allocations from reputable
endowments, pensions, and corporations could unleash a new wave of
investment in cryptocurrencies.
3. Bringing the Technology to Scale
Bitcoin and other cryptocurrencies are still developing the capacity to function at a mass
scale, which will require processing tens of thousands of transactions
per second. But technology such as Plasma, built on Ethereum, and the
Lightning Network, a second layer payment protocol compatible with
Bitcoin, are being tested, which could enable cryptocurrencies to
execute faster, cheaper payments and settlements than any other payment
method. Though developing applications that bring cryptocurrencies such
as Bitcoin and Ethereum to scale may not happen overnight, I think
sooner or later; developers
will get it right.
Making
cryptocurrency scalable would probably unleash an explosion of new
applications. That would boost adoption by allowing consumers and
businesses to more easily take advantage of cryptocurrency by seamlessly
integrating it with debit and credit payment systems – again, to
execute transactions, update mutual ledgers, execute contracts, and
access records. Such financial activities would likely happen more
quickly, cheaply, and efficiently than ever because there would be no banking intermediary needed to validate the transaction and take a cut of the fees. This
could improve the cost and efficiency of commerce – between businesses, between businesses and consumers, between governments and consumers, between nonprofits and consumers, and in every combination thereof. The seeds for this transformation of commerce have been planted, and like the internet before it, can innovate in ways we can’t fully anticipate.
4. Meeting Developing World Needs
At
its current technological stage, use of cryptocurrency adoption as a
payment method could grow fastest in emerging markets, especially those
without a secure, reliable banking infrastructure. Many consumers in
such regions have a strong incentive to transact in cryptocurrency --
either because their country’s current banking payment system is
inefficient and unreliable, and they lack a bank account altogether. Globally, 1.7 billion adults remain unbanked. Two-Thirds of them own a mobile phone that could help them use cryptocurrency to
transact and access other blockchain-based financial services.[2]
Data
underscores the receptiveness of Developing World consumers to
cryptocurrency as a transaction medium. The Asia Pacific region has the
highest proportion of global users of cryptocurrency as a transaction
medium (38%), followed by Europe (27%), North America (17%), Latin
America (14%), and Africa/The Middle East (4%), according to a
University of Cambridge estimate.[3] Although the study’s authors
caution that their figures may underestimate North American’s proportion
of global cryptocurrency usage, they cite additional data from
LocalBitcoin, a P2P exchange platform, suggesting that cryptocurrency
transaction volume is particularly growing in developing regions,
especially in:
- Asia (China, India, Malaysia, Thailand)
- Latin America (Brazil, Chile, Colombia, Mexico, Venezuela),
- Africa/The Middle East (Kenya, Saudi Arabia, Tanzania, Turkey)
- Eastern Europe (Russia, Ukraine).[4]
As
more applications launch in the developing world to facilitate the use
of cryptocurrencies to buy and sell goods and services at lower cost and
in expanded markets -- and more young people receptive to such new
technologies come of age -- cryptocurrency adoption could well rise
exponentially.
Remember The Internet - Investment Bubbles and Bursts Will Identify The Winners
High
volatility is inherent in the investment value of this nascent
technology, due to factors including technological setbacks and
breakthroughs, the impact of pundits, the uneven pace of adoption, and
regulatory uncertainty. Bitcoin, for example, generated a four-year
annualized return as of January 31st,
2018 up 393.8%, a one-year 2017 performance up 1,318% -- and
year-to-date, down 52.1%. Bitcoin has experienced even larger percentage
drops in the past, before resuming an upward trajectory.
I believe roughly thirty percent of Bitcoin investors over the past half year are speculators since the cryptocurrency has dropped on the negative
news by as much as a third. In my view, Bitcoin and other
cryptocurrencies will experience many more bubbles and bursts, in part,
fueled by speculators, who buy on greed and sell on fear.
But as the dot-com
era underscores, the bursting of an investment bubble may signal both a
crash and the dawn of a new era. While irrational investments in
internet technology in the 1990’s fueled the dotcom bust, some well-run
companies survived and led the next phase of the internet revolution.
Similarly, despite periodic price crashes, I believe a small group of
cryptocurrencies and other blockchain applications, including Bitcoin,
will become integrated into our daily lives, both behind the scenes and
in daily commerce.
Although
“irrational exuberance” will continue to impact the price of
cryptocurrencies, this disruptive technology represents the future not
only of money but of how the world will do business.
~~~
Brian
G. Sewell is the founder of Rockwell Capital; a family office committed
to educating investors about cryptocurrency, and Rockwell Trades, an
institutional cryptocurrency trading platform. He may be reached at http://rockwelltrades.com.
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