Solving for adoption: cryptocurrency and the mainstream
Update: BVNK is now focussing on providing core banking infrastructure for digital assets and fiat to financial institutions directly, and are working closely with regulators and governments to help usher in new finance.
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Cryptocurrency is a complicated topic, both technically and politically. One could argue that the perplexing nature of cryptocurrency has, despite a relatively recent surge in popularity (and a more recent decline), continued to discourage the mainstream.
And it is most definitely not mainstream. Some estimates suggest that between 0,05–0,1% of the population own Bitcoin; 0,31% if you assume that people only have one wallet. Even if we assume that the 80% of the population that live on less than $10 can’t or won’t buy cryptocurrency, that’s only 1,5% of the ‘eligible’ population. While these figures will never be accurate — thousands of wallets are being generated each day — the point is clear: Bitcoin is no where near even the ‘Early Majority’.
That doesn’t mean cryptocurrency can’t go mainstream, it has the potential, there are just teething issues that need to be solved before it does: security, accessibility and utility. This list isn’t exhaustive, but solutions for each could go a long way to pulling cryptocurrency into the norm.
Security
Attacks on exchanges are lucrative. Over $15 billion worth of Bitcoin has been stolen since the genesis block was hard-coded. Interestingly, there is factor that contributes to the ease in which some of these exchanges were hacked: virtual partitions. Most exchanges aggregate all their assets into a, or a series of, centralised wallets owned by the exchange itself. They then virtually partition it to allocate value to the platform’s users. This has a couple of advantages: trading fees are pure profit and generally lower, trading is far quicker and a large portion of the digital assets can be stored offline. There are disadvantages too: user’s don’t technically own their cryptocurrency and don’t have access to private keys, wallets can’t be regenerated and hackers only have to focus on one point for a massive payoff.
Although secure wallets are definitely a priority, security is far more than that comprising regulation (the security of acquiring and managing those digital assets) and volatility (the security of investing in the digital asset itself).
While many cryptocurrency enthusiasts are against cryptocurrency regulation in its entirety, if kept responsible, regulation can mitigate many of the native risks and serve as a springboard for institutional, and consequently mainstream, adoption. Early adopters and fringe liberals are bound to be advocates of a regulation free system, but adoption is all about perception and the population perceive regulation as safe, maybe even as mandatory.
Then there is cryptocurrency’s infamous volatility. Again, referencing the 80% that live on $10, few could risk investing in something that can lose 66% of its value in less than two months. That is unless their local currency is losing value more consistently. Even without the periodic crashes, Bitcoin, for example, has a daily volatility of around 5%, which is up to 7 times higher than most forex pairs.
There are many factors contributing to price instability, but the absence of a central bank to regulate supply and demand is definitely a major one. Introducing a central bank to regulate cryptocurrency, however, defeats one of the core purposes for its existence in the first place: decentralisation. That doesn’t mean their are no options, nor does it mean that central institutions are completely useless in this space. Although it’s not a popular opinion in the cryptocurrency zeitgeist, there is always potential hidden in a merge of the existing financial system and this very new technology.
Volatility is also caused by public perception. When people are selling more than they are buying, the price goes down and when they are buying more than they are selling the price goes up. So one simple solution would be to focus on utility. More on this later.
Accessibility
While access to technology is becoming less and less of a factor, it still has an impact on who can access cryptocurrencies. Two third’s of the world’s population don’t have smart phones which is a soft requirement for managing cryptocurrency, and half have no access to internet, a hard requirement.
In the developed world, however, accessibility is largely influenced by perception. People still do not understand cryptocurrency, and even for those who are new to it and understand the basics, buying and managing cryptocurrency can be daunting. If you have no financial experience, understanding the market page of a cryptocurrency exchange is difficult without help.
And even those that manage to buy don’t understand the technology itself often going into credit to fund their ‘FOMO’. So when the price does drop, panic sets in, more people sell and a vicious circle starts which creates a self fulfilling prophecy. This culminates in wide spread negative press which entices those that are bullish on cryptocurrency to beat the war drums of financial revolution and those that are skeptical to fortify their bearish position.
Utility
This is the most important part of the cryptocurrency equation, and something that is largely overlooked by novice investors ignorantly putting their money into cryptocurrency. Cryptocurrency can overcome many of the challenges that an antiquated financial system has left us, initially with (but not limited to) payments.
However, when we start to look for reasons as to why cryptocurrencies that have been explicitly created for payments, like Bitcoin, have slow adoption in that area, we find familiar factors. Volatility being a big one.
Using Bitcoin as an example: when the price of Bitcoin is rallying, people with Bitcoin want to hold their cryptocurrency, not transact with it. And when the price of Bitcoin is crashing, people want to get rid of their positions, not transact with it. Merchants, on the other hand, want to avoid the risk that comes with accepting Bitcoin. They don’t want to risk accepting a specific amount of Bitcoin for a product or service, only for it to drop in value and cause a loss for the merchant.
Solving any cryptocurrency’s volatility issues is a hotly debated topic, especially because one of the more common methods of stabilising a currency’s price is controlling supply and demand; a function traditionally handled by a central bank — something that Bitcoin was specifically created to avoid. There are a variety of proposals detailing how other mechanisms could play the role of the central bank and control supply or demand or both. Ironically, one such mechanism is pushing for more demand by creating reasons for people to use cryptocurrency and merchants to accept it. This improves liquidity and ends up stabilising the price. From there, more use cases will be created compounding that stability. That being said, there we find a familiar conundrum lurking: which comes first? The chicken or the egg?
The reality is cryptocurrencies still need to mature before they can really go mainstream. This isn’t just a maturation of the technology, but also of regulation, and for that to happen, the opinions that make up industry itself.
So what are we doing about some of the challenges facing cryptocurrency?
Proprietary wallets: our wallets are individually generated meaning that we don’t have a central store of other people’s cryptocurrency — no central point of failure. And, verified users have access to their private keys. They can regenerate their wallets using any other software and have complete control over their digital assets.
Simplicity: our platform is designed to be as simple as possible so anyone can use it. We also support multiple channels: SMS, USSD and even Facebook Messenger. We are making finance as simple as sending a text.
Modern utility: we are constantly exploring ways to assist merchants to accept cryptocurrency as payment as well as better ways for users to use cryptocurrency to pay and have begun developing a real-time currency exchange service that will seamlessly integrate payments of differing currencies. In addition, we are working on remittance, lending, forex and network-based financial solutions in order to bring a useful layer of functionality to cryptocurrency. Lastly, we are working on a community based platform that will enable anyone to build financial solutions on top of cryptocurrency - eventually even fiat.
Finance can and should be better. It’s as simple as that. And we are doing everything we can to make it so.
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BVNK is API driven banking infrastructure for digital assets and fiat.
We enable banks to operate more like FinTechs by providing an agile platform with which to create and integrate modern finance.
Find out more here or to get in touch to find out how we can enable your bank to integrate innovation.
References:
http://www.worldbank.org/en/topic/poverty/overview
https://www.statisticbrain.com/world-poverty-statistics/
https://steemkr.com/bitcoin/@scandinavianlife/how-many-people-own-bitcoin-alt-coins-and-how-large-are-their-wallets
https://www.reuters.com/article/us-cyber-nicehash/hackers-steal-64-million-from-cryptocurrency-firm-nicehash-idUSKBN1E10AQ
http://fortune.com/2017/12/14/new-bitcoin-restrictions/
https://www.moneyweb.co.za/news/markets/bitcoins-crash-is-turning-into-one-of-its-biggest-ever/
https://www.forbes.com/sites/mikepatton/2014/05/09/the-three-countries-with-the-highest-inflation/
https://www.coindesk.com/can-bitcoins-price-ever-stable/
https://www.statista.com/statistics/203734/global-smartphone-penetration-per-capita-since-2005/
https://en.wikipedia.org/wiki/Global_Internet_usage
http://www.businessinsider.com/bitcoin-price-rises-but-retailers-wont-accept-it-7-2017
https://blog.ethereum.org/2014/11/11/search-stable-cryptocurrency/
https://venturebeat.com/2017/06/17/heres-how-we-start-to-stabilize-bitcoin-ethereum/
