Why crypto will revolutionise the finance industry

 

Cryptocurrencies – or more accurately, crypto assets – are all the rage now. Every week, there seems to be breaking news about some new development in the nascent space. Just two weeks ago, the entire crypto market crashed more than 40%, making it one of the worst crashes in its 12-year history. To get a sense of its scale, almost a trillion dollars were wiped off from its total market cap in a matter of days.

Add that to the fantastical stories of those who buy some unknown cryptocurrency only to have it appreciate in value so quickly as to make them millionaires in a matter of months and you have an industry that incites both agony and ecstasy in equal measure.

Despite how fractious opinions on it are, one thing’s undeniable: adoption of cryptocurrencies is increasing everyday, with hundreds of millions of people across the globe embracing it. This is because, among other things, cryptocurrencies possess a few key characteristics:

1. They are digital money secured by cryptographic technology. This makes them inherently hack-proof (exchanges and smart contracts however, can be hacked or exploited).

2. They are decentralised, hence they don’t rely on a centralised authority (like a bank) to process and validate transactions. This is made possible by blockchain technology, which stores all transaction data in a transparent, distributed online public ledger. This allows for trustfree, permissionless, peer-to-peer money transfer.

There are multiple reasons for their increasing allure. The table below compares cryptocurrency to standard fiat currency, illustrating its attractiveness:

However, for all their virtues, cryptocurrencies aren’t without their risks. For one, their prices fluctuate wildly, often taking their owners on a wild, emotional roller coaster. These are some of the many things that affect their price:

1. Regulatory decisions: When major countries such as the US and China decide to regulate, ban or allow the use of cryptocurrencies, their prices are drastically affected. For instance, when Chinese authorities vowed to crackdown on Bitcoin mining and trading on May 20, 2021, its price tumbled by around 8.5%, taking the entire cryptocurrency market with it.
2. Technology upgrades: Cryptocurrencies are often subjected to periodic technology upgrades that usually result in their prices rising due to their increased utility.
3. Institutional investment: In August 2020, MicroStrategy Incorporated, a publicly-traded company, purchased US$250 million worth of Bitcoins, marking a watershed moment for Bitcoin’s institutional adoption. Since then, they’ve poured many millions into purchasing more Bitcoins. Similarly, other major corporations such as Greyscale and Tesla have billions of dollars worth of Bitcoins in their account books. Unsurprisingly, this caused massive spikes in Bitcoin’s price.
4. Whale action: Whales are investors who hold massive amounts of a cryptocurrency and whose actions can have a marked influence on the market. Their actions are among the primary reasons for the stunning market crash of May 2021.
5. Social media and influencers: Tesla and SpaceX CEO Elon Musk is a larger-than-life personality whose regular Tweets about a cryptocurrency called Dogecoin has largely caused its massive price pump, making it go from US$0.008 early this year to a high of US$0.73 in early May 2021 – a price increase of around 8,800% in just five months. Similarly, other personalities such as Jack Dorsey, Mark Cuban, Bill Gates, and Charlie Munger, among others, can affect the prices of cryptocurrencies as well, to varying degrees.

And as should be abundantly clear now, the events detailed above can happen without much forewarning. In addition, many cryptocurrency exchanges have had multi-million dollar hacks and rug pulls that have cost their customers dearly.

Due to these external influences, wild price fluctuations and the risk of exploitation, it is not for those with no or little knowledge of the cryptocurrency scene.

But, looking at the system, I have no doubt that it will eventually upend portions of traditional banking. We’re already seeing this trend unfolding in front of our eyes.

Goldman Sachs, one of the world’s leading investment banks – which derided crypto just a year ago – has turned around to its virtues and is now calling it a new asset class. And just two months ago, Morgan Stanley, another banking giant, became the first US bank to allow its high net worth customers access to three funds that hold Bitcoin in their balance sheets. More banks will undoubtedly follow suit.

To glean some insights on how the cryptocurrency industry might evolve, all we need to do is look back at history.

Most of the developed world went from transacting using cash to transacting using credit and debit cards and then transacting via e-wallets. China, however, skipped the credit and debit card phase and went directly from cash transactions to e-wallets (WePay, AliPay). Similarly, I see much of Africa skipping even e-wallets and going directly from cash transactions to crypto transactions.

It’s going to be an exciting few decades for the world of finance. Cryptocurrencies, arguably the biggest technological innovation since the internet, are not only set to disrupt the entrenched players in the financial industry but are also expected to empower the billions who are unbanked. - FMT

The writer can be contacted at kathirgugan@protonmail.com.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.