Has the Crypto Craze Just Begun?
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I first heard about bitcoin a few years back from a friend of mine. It sounded a little too good to be true. After all, this was a currency that had zero accountability and you could hardly trace the participants. Yet it was growing more than 100% annually. But the more I explored it, the more it fascinated me. Everything I learn is strengthening my belief that cryptocurrencies are the solution to a long-standing problem that has plagued the global economy.
Money is a means of storing and exchanging value. This medium could be gold, silver or a regulated currency. Unsurprisingly we have preferred objects which are neither easily replicable nor will diminish in value over time. While fiat currencies of today have their own merits, there is no means of limiting the amount that can be minted. Whenever a new note is printed, the entire currency is devalued. So, if I were to store $100 in a vault, it would lose some of its value as more dollars come into circulation.
This wouldn't be a problem if your country's economy grows. As long as more goods and services are being produced, we would never feel the effect of the increment in currency supply. But we know that this is not always the case. When the amount of currency in circulation outstrips a nation's production, it's value falls. This is exemplified by the meteoric rise of cryptocurrencies in countries like South Korea, Japan, Nigeria and Zimbabwe.
When Bitcoin came to life in 2009, it was noticed only by a few programmers on online cryptography discussion boards. The revolutionary digital currency allowed virtually anyone to exchange value without the involvement of a third party. It reprieved us from the endless inflationary cycles of fiat currency as only a finite number of bitcoins will ever exist. The system breaks many of our current economic models and is difficult to regulate. For close to a decade cryptocurrency was too small to bother with, but things are changing quickly.
Today we witness an explosion of cryptocurrencies, with new coins and protocols being released almost every day. Regulators and corporate entities are stepping into the crypto sphere in a big way.
2018 will be the year that cryptocurrencies achieve mainstream acceptance across the world. The fastest adoption of cryptocurrencies will be in countries with lower interest rates. Over the past two months, the market capitalization of bitcoin in South Korea alone has increased from $106 billion to $307 billion. In economies with low-interest rates and rising inflation, many will hedge their saving by converting it from fiat to crypto. This will cause a network effect where the rising value of the cryptocurrency market will pull investments from newer markets. Banks may find it increasingly difficult to maintain appreciable liquidity of fiat currencies.
Governments and Banks Entering the Space
While China, South Korea and Kuwait have attempted to curb the growth of cryptocurrencies, a few have announced plans to float national currencies on the blockchain. Russia has announced "Crypto Rouble", Estonia is building Estcoin for its e-residents and even Venezuela is looking to release an oil-backed cryptocurrency.
An increasing number of banks and financial institutions are exploring cryptocurrencies to reduce risk and improve capital efficiency in financial markets. To this end, Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street partnered with UBS to build their 'utilities settlement coin'.
Rise of Utility Coins
A utility coin is multidimensional in the sense that its value is built on a mix of speculation in the asset and demand for their use in the intended network. This class of cryptocurrency is designed for a specific category of transactions. For instance, the value of Filecoin, a crypto that powers transactions in a decentralized data storage network would grow as more people and entities participate in their network. Unlike equity in a company, the value of utility coins does not rely on the performance of a single corporate entity but the collective participants forming the network.
We will witness the emergence of new social structures around these decentralized and self-organized economies.
Decentralized and Shared marketplaces
One of the most apparent applications of cryptocurrencies would be in the burgeoning Sharing Economy and E-Commerce. The adoption of cryptocurrencies will bring down the marginal cost of transactions and foreign exchange fees. It shall open up the possibility for the sharing of assets like our homes and cars to even digital assets like storage space and computing power.
We will see the emergence of pure decentralized peer-to-peer marketplaces where people from across the world can trade directly with each other without any intermediaries or middle-men.
One of the most interesting applications of cryptocurrencies is the creation of decentralized marketplaces for computing resources. Projects such as Golem and SONM would allow people to trade idle computing resources using their utility tokens. By combining the resources of billions of devices worldwide these platforms could create the next generation of supercomputers.
I believe that the combined cryptocurrency market-cap of over $780 billion isn't going away anytime soon. Everyone that's worried about everything hitting zero at the same time shouldn't be. For though it may be theoretically possible, it is highly improbable.