After the cryptocurrency bubble burst in 2018, following its peak in late 2017, one must wonder are cryptocurrencies here to stay?
Update: an essay version of this same piece won 3rd place provincially for CPA Ontario’s Ignite Competition!
At first glance, cryptocurrencies may represent the future of economics with financial transactions powered by the revolutionary underlying blockchain technology. However, there are glaring issues with cryptocurrencies serving as an investment and as a transactional currency that suggest that cryptocurrencies are on their way out.
Who even uses crypto?
To begin, the continued failure of cryptocurrencies as a day-to-day transactional currency is concerning. An obstacle to mainstream adoption is the lack of practical opportunities to spend it in today’s economy. As Guy Melamed of Zeex, an online shopping platform with cryptocurrencies puts it “In order for cryptocurrencies to become mainstream, the infrastructure surrounding it must be user-friendly and efficient. Otherwise, adoption may be limited to a select tech-savvy audience as it has largely been until now.” Additionally, cryptocurrencies pose far more legal questions than it can answer. In order for consumers to rapidly adopt cryptos, cryptos must evolve into a currency that has precise legal regulation outlined by becoming legal tender. At the moment, most of the world’s largest economies, such as Canada, India and China, do not consider any cryptocurrency as legal tender and some have even prohibited its use entirely. With user adoption still on the decline, cryptos may not be ready for primetime just yet.
A Rough Technology Road Ahead
In addition, cryptocurrencies face many technological drawbacks. Many of the limitations of cryptocurrencies are due to the underlying blockchain technology and the lack of an established universal protocol for cryptocurrencies. Similar to how HTTPS was the final link in unleashing the full potential of the internet, blockchain technology will also require a universal communication protocol between various blockchains, which is seemingly years away. Additionally, scalability is a problem that plagues most popular cryptos. The main issue here is concerning the limit of transactions per second of bitcoin.
For example, Ripple, one of the fastest cryptos, can only handle up to 1,500 transactions per second (tps), which pales in comparison to Visa’s 24,000 tps. This limit has created a major bottleneck in bitcoins overtaking fiat currencies as legitimate digital currencies. These limitations in technology and infrastructure have made it very tough for cryptos to transition into a viable virtual currency.
Is it even a viable investment?
Lastly, there are many concerns over using cryptocurrency as an investment. A lot of this concern stems from the lack of a classification of cryptocurrencies as securities by the SEC. This lack of support from the SEC Chairperson Jay Clayton means that cryptocurrencies won’t be regulated similar to bonds and stocks, making it harder to trust/ making it more sketch for corporate investors. Furthermore, cryptocurrencies have been very volatile since its inception. In fact, over the past 10 years, the crypto market has already faced two major bubbles and busts in 2013 and 20178, despite the overall stability and long-run bull run in the overall market. This volatility prevents it from being a viable “digital gold” investment. As clarified by a KPMG report, “To fulfill the requirements of a store of value, cryptocurrencies must be much more stable.” Additionally, traditional fundamental metrics cannot be used. With stocks or other securities, investors can access balance sheets, income statements, earnings reports and much more. Whereas, with crypto, there are no data points that investors can use to analyze and attempt to assign value to these virtual assets, making it hard for traditional investors to transition into investing in cryptocurrencies. Warren Buffet, the legendary investor, explains:
If you buy something like bitcoin or some cryptocurrency, you don’t have anything that is producing anything,” Buffett says in an interview with Yahoo Finance. “You’re just hoping the next guy pays more. And you only feel you’ll find the next guy to pay more if he thinks he’s going to find someone that’s going to pay more.
Warren Buffet is driving at the fact that cryptos, like Bitcoin, have no intrinsic value. This sentiment is reflective of the majority of corporate investors.
Given the low likelihood of these problems being addressed in the near future, cryptocurrencies will continue to be a tough sell to traditional and corporate investors.
So are cryptocurrencies and blockchain just all hype?
To conclude, while cryptos are not here to stay, blockchain is an emerging technology with great potential in areas apart from cryptocurrencies. Currently, there may be adoption-related, technological and investment-related challenges that cryptos face that they are on their way out.
Hello, you have made it to the end of this article! This was my first ever Medium story. I would appreciate any claps or comments. If you have a contrasting view, please share it in a respectable manner in the description below. This was a much more persuasive essay format, so I did not provide arguments for the opposing standpoint.