By December 2017 at the latest, even the last halfway interested person should have heard of digital currencies. The reason for this is the massive price fluctuations (both upward and downward) and the associated media coverage. What is all the fuss about?
All beginnings are clandestine
A little digression into a different kind of project – crypto initiatives. As is often the case with real trends, you usually only recognize them after the fact. This is, of course, the case here as well. When a still unknown person under the pseudonym Satoshi Nakamoto first publicly thought about Bitcoin in 2008 and published the corresponding software in the following year, nobody assumed that this cent currency would be traded for up to 20T USD per unit a few years later.
The idea was simple, and of course deeply influenced by the disruptive spirit of their generation.
We need a currency that is not constrained by government regulation.
It should be a means of payment accessible to anyone with a suitable client.
The creation and distribution of the money will be decentralized, encrypted, and tamper-proof through a replicated log (blockchain).
This is going to be great.
Many more currencies were to jump on this basic idea in the following years, some more closely related, some with their own approaches. Today there are more than 1000 of them, with a market capitalization of about half a billion USD. Some, like big brother Bitcoin, want to be a means of payment, others want to fundamentally transform research, industry or the media landscape. However, a concept that is about to make such profound changes in such central places does not have an easy start.
The struggle against peaks can fill a man’s heart
Let’s take the example of Bitcoin in terms of currency reform. There are quite a few stumbling blocks here, unless everyone involved is just an idealistic, forward-looking and benevolent person.
- First, of course, a means of payment only has value if it enjoys the trust of the payers (debtors). A new currency generated and distributed in a novel way by entities unknown to me without an address? How familiar do I have to be with the technology to have my salary paid out in digital currency with a clear conscience? How high is the risk that the new currency will disappear again, along with my invested „real“ (FIAT) money, just as a technical gimmick of some freaks?
- Trust is of course a two-sided question, because in the beginning, of course, the points of acceptance of the new currency are also quite rare (creditors). Even today, the growing list for Bitcoins (still the best-known digital currency) mainly includes usual suspects such as software manufacturers (Microsoft), online initiatives (Mozilla, Wikipedia) and some progressive service providers. That needs to change for the currency’s character to really come to fruition. Until then, digital currencies will remain hobby projects with speculative character.
- Another layer of uncertainty is custody. While experience has shown that I can store balances in thoroughly regulated banks or (for those who like it) bills in my pillow just fine, with whom do I store digital currencies? I could leave them with the trading platforms, or place them with appropriate online wallets. Hardware wallets are also an alternative. No matter where I store my currencies, the key question is: how secure are they there?
- In order to prevent manipulation and deception during transactions, I must be able to trust my individual business partners due to the lack of a central trust authority. I’m sure that works great in the 5-man developer circle of South Recklinghausen. However, in daily payment transactions with strangers and several dozen transactions per day and participant, this becomes an issue.
A good investment?
Today, digital currencies serve as a means of payment only to a limited extent, also due to the manageable number of acceptance points. They are often more of an investment object for some and a capital-raising measure for others.
Many bold projects with ambitious goals want to break new ground with their ideas. The capital needed for this is raised at Coin / Token Exchanges such as bitfinex, coinbase, bittrex and Poloniex. Through Initial Coin Offerings (ICO) and regular trading via the exchanges, the new currency becomes a kind of financial investment, where the major trading platforms especially neatly price the exchange of and into FIAT currencies. Deposit and withdrawal fees FIAT <-> Digital of 20-30 USD minimum fee are not the exception. So the brave new world of low fees is (still) reserved for those who limit their activities to digital-only trading.
Even after the big waves in December, the rates are mainly something for the risk-averse investor, and with futures trading, it is of course possible to bet short. Because, of course, there were security problems, collapses and scandals – all of it, as always, glossed over by our dear media, who also rush from one shocking news item to the next on this topic in order to ensure their own survival. Without a „real existing“ basis or state legitimacy, digital currencies are at the mercy of the play of forces (and thus also investor opinion) almost without protection.
An example to illustrate: some internet cheese paper writes (not linked here) that IOTA falsely claimed a partnership with Microsoft and Bosch. This is followed by a massive price drop for the Berlin IoT currency. A few days later, the retraction: Oh, that’s right, IOTA didn’t claim that at all, it was simply misquoted. And actually, Bosch is a partner after all. The medium got its clicks, and the price of IOTA recovered only slowly.
Here, even more than in traditional trading with „real“ capital products, the weal and woe of my portfolio depends on the current weather conditions.
This is not for the faint of heart, and with the extremely fluctuating prices, it is not a sensible basis for the actual purpose: the use of Bitcoin as a currency, for example, requires a certain stability of value. Otherwise, my baker will either lose sales due to too high prices or go bankrupt due to too low prices if he does not adjust his Bitcoin prices daily (or hourly) to the current price development.
An idea of the future
So where do we go from here? Mrs. Merkel would possibly say „Have understanding, it’s uncharted territory.“ And it is.
No one has experience with projects of this type and magnitude. The politicians don’t, the business community doesn’t, and neither do the currency providers themselves. Everyone certainly has ideas, and many also have interests. One or the other will tend to draw comparisons, to the last revolution would lend itself to that, the age of the platforms was also something surprising. But this is different, and what must and will happen next is completely written in the stars.
With the entry of large institutional investors through bitcoin futures trading, a door has been pushed open into a world where strategic investment on a large scale becomes part of the game (cue drying up, skimming, etc.). The comparatively small market capitalization doesn’t even set a particularly high hurdle for such market-shaping instruments. Other financial products (ETF anyone?) and currencies (Ethereum is at the forefront) will follow promptly. This, in turn, will make access easier for investors, capitalization higher, and thus the funding base broader. It can therefore be assumed that the trend will continue to point upwards, only on this path with violent swings.
More ideas will be born that are financed via cryptocurrencies, but the road to the top 10 is quite rocky. Only very few currencies still mean something 1 year after the ICO, and github quickly falls silent again when the first founding frenzy is over.
Personally, I firmly believe that some of these projects will succeed. By no means all of them, probably not even many, but some of them will change our world. However, as a layman, I’m not very convinced that the pioneer in cryptocurrency (Bitcoin) is really any good as a currency. The drawbacks of transaction speed (7 per second, really?) and volatility are too great.
Other ideas will simply be ahead of their time, and possibly successfully revisited later. Whether now as a visionary or as a shareholder, everyone with an interest in the developments of the future should keep an eye on the topic. Even if it is still in its infancy today for good reason.
After all, we of all people should have learned in the past 10-15 years that disruption sometimes happens faster than expected.
Here’s to a hopeful future,
