Are cryptocurrencies being hugged to death by Wall Street
Summary
Cryptocurrencies dropped more than $400 billion since their all-time-high in December 2017.
Key issues in the crypto market include price volatility, lack of security, cyber-attacks, slow transaction time, high transaction fees, and money laundering.
Major Wall Street and Silicon Valley companies such as ICE, Microsoft, CME, Goldman Sachs, and even Starbucks are entering the cryptocurrency business.
But experts warn that Bitcoin derivatives on the stock exchange might cause severe fluctuations in the value of this cryptocurrency.
Major retailers such as Amazon and Walmart are already wary of cryptocurrencies.
The potential for growth in this market lies in innovative services such as smart contracts and the application of blockchain technology to various sectors.
Cryptocurrencies have taken headlines by storm in the past few years. In no small part, that’s because the reputation of these cryptographically secured assets, with Bitcoin as the most valuable one, is as wild as their price. But despite swings in fortune, the industry kept growing. A 2017 study by the University of Cambridge estimates the number of unique active users of cryptocurrency wallets to be between 2.9 million and 5.8 million. In the same year, the number of retailers accepting Bitcoin as a payment method grew from 8,665 to 11,291. Unfortunately, what often followed this period of spectacular growth were disasters of similar magnitude.
An estimated $200 billion has been wiped off the value of Bitcoin from its all-time high in December 2017. Along with other cryptocurrencies, total losses amount to $400 billion. Then there’s the issue of security. For example, $300 million of the cryptocurrency Ether was accidentally lost forever due to a bug, while hackers seized $530 million in cryptocurrencies from the Japanse exchange Coincheck. And if your Bitcoins weren’t stolen and you want to use them, a transaction time of 30 minutes to 16 hours, to say nothing of transaction fees of up to $34, could test your patience.
But these issues didn’t deter crypto companies and corporations. For them, the first order of the day is to stabilise cryptocurrencies either by pegging them to the dollar or by pushing more dollars into the system. But cryptos aren’t just an alternative payment solution; services such as smart contracts could be game-changers. Then there’s the potential of blockchain technology itself. It can improve cloud technology, messaging, real estate, and banking. And as cryptocurrencies keep making headlines and there’s money to be made, Wall Street and Silicon Valley just can’t resist rolling their dice.
The danger of Bitcoin derivatives
Intercontinental Exchange (ICE), Microsoft, and Starbucks teamed up to create Bakkt, a platform that will help consumers “convert their digital assets into U.S. dollars for use at Starbucks”, says Maria Smith, the vice president of Starbucks. ICE, the owner of the New York Stock Exchange, has an even more ambitious idea. It’s planning to use Bakkt to offer Bitcoin futures pending the U.S. Commodity Futures Trading Commission’s approval. This idea isn’t new, as the CME group, which owns derivatives and futures exchanges in Chicago and New York, already lists Bitcoin futures.
The interest of corporations is both good and bad news for the crypto market. On the one hand, it will probably attract new investors and make regulators more comfortable. On the other, Wall Street might influence the price of cryptocurrencies via derivatives markets. For example, the value of Bitcoin derivatives traded on the stock market might not be fully backed by the underlying coins. This could lead to severe Bitcoin price fluctuations and a market bubble. As the crypto expert Caitlin Long explains, a “centralized institution that is allowed to create financial claims to Bitcoin out of thin air has the potential to erode some of that trust and transparency”.
Problems for retailers
As Wall Street gambles on cryptocurrencies, it paves the way for other big players to enter the market too. But Amazon and Walmart are wary of the crypto market. Third-party payment processors that convert Bitcoin to dollars are small and unreliable. Their regulatory compliance is questionable, too, and the liquidity of Bitcoin is often inadequate. But with new changes such as Bakkt’s payment solution and a Bitcoin futures market, “large retailers will be able to accept Bitcoin, have it immediately converted to cash or hedged, and do so on a massive, trusted, regulated exchange,” says David Johnson, the CEO of the crypto company Latium.
While Amazon and Walmart gave no signs of entering this arena, that might be a blessing in disguise. The volume of transactions these giants would create is something blockchain technology isn’t designed to cope with. For example, while the popular blockchain platform Ethereum can process only around 13 transactions a second, Visa can run 20,000. And while retailers and corporations are concerned with the payment processes, speed, regulations, and the stock exchange, the price volatility is what gives small crypto investors sleepless nights.
How to stabilise the price
The wild price swings of cryptocurrencies are “largely speculation driving prices up and down”, says Dominik Rehse, a specialist in blockchain technology. But it’s much more than that. Lost savings, destroyed families, and even suicide are what’s left in the wake of crypto crushes. That’s why solving this problem is such a high priority.
There are two schools of thought on this matter. One group argues that ‘stablecoins’, cryptocurrencies pegged to traditional currencies, can reduce volatility and increase trust in the crypto market. Circle, a crypto finance firm backed by Goldman Sachs, is pushing this solution. "Imagine a US dollar coin that you can make payments with, use on crypto networks, or use in smart contracts to pay dividends, but which you can convert back to fiat currency at any time," explains Circle’s chief executive, Jeremy Allaire. Others strongly disagree. Obi Nwosu, the founder of the cryptoexchange collective Coinfloor, argues that price volatility must be solved by attracting more investors. After all, the stablecoin concept “conflicts with the decentralised nature of cryptos and blockchain technology and could be the worst of both worlds”.
But both groups agree on one thing: cryptocurrencies must become more than just an alternative payment system. One way to go is by developing smart contract services. Once the rules are met, blockchain executes the contract without the need for a middleman. For example, imagine you just paid your rent in cryptocurrency. Blockchain releases a digital key stored by the owner that enables you to enter the apartment. If the key didn’t arrive or is incorrect, you’ll get a refund. If the owner sends the key too early, the system holds both the key and the fee until a specific date. The concept of smart contracts is applicable in many types of transactions and works hand-in-hand with blockchain technology that’s proving invaluable in various sectors.
An uncertain future
Judging by the past, the future of cryptocurrencies will continue to be bumpy. While some businesses such as Overstock, Shopify, Microsoft, and Expedia accept cryptocurrencies in some way, it’s far from the mass adoption its hype suggests. Problems such as volatility, lack of security, cyber-attacks, slow transaction times, and high transaction fees are significant barriers to growth. Despite that, crypto companies and big corporations aren’t giving up.
Wall Street’s financial giants and Silicon Valley’s tech wizards are cooperating to play the crypto market like a long-term poker game. While they have their eyes set on huge profits, others are using cryptocurrencies to build cache. But nearly everyone agrees that they need greater stability, more money, and better regulation. Experts warn, though, that this new cryptomarket might mean the end of Bitcoin as we know it. As for smaller crypto companies, they see a potential in smart contracts and the wide application of blockchain technology.
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Meaning of trend
Despite the significant problems they face, cryptocurrencies are a growing trend. Even Wall Street and Silicon Valley giants are lining-up to get a share of the profit, or at least, some publicity. But their plans risk severe fluctuation in Bitcoin’s value. At the same time, crypto experts realise that the real value of any cryptocurrency can be found in innovative services such as smart contracts and the wider application of blockchain technology.
Expert Opinion
“The arrival of well-functioning cryptocurrencies could, for example, be a boon for users of retail banking services enabling them to use low-cost, fully verifiable transaction mechanisms to replace the existing expensive payment services offered by banks. But this is essentially replacing existing systems with cheaper alternatives and the potential for innovative services is probably where the long-term benefits lie,” writes Ania Zalewska, a professor of finance at the University of Bath.
Dominik Rehse, a specialist in blockchain technology at Germany's Centre for European Economic Research (ZEW), argues that “just like countries with high inflation often struggle due to unstable currencies, the same applies for cryptocurrencies. For them to become a commonly accepted method of payment, they need to be stable."
"Crypto represents the next layer of infrastructure for the internet. It will allow money to move at the speed of light around the world for free, but also offer binding, verifiable contracts, enabling anyone to do business together,” says Jeremy Allaire, the CEO of the crypto finance company Circle.
This article was originally published in 2018 on Diynxt.com.