What's next for cryptocurrency?
For the past 18 months, cryptocurrencies have been stealing the financial headlines – and it seems the rollercaoster ride is just getting started. Siobhan McFadyen asks what’s next in the crypto revolution?
FIFTY years ago, market fluidity was revolutionised forever when Barclays went head to head with Westminster Bank in a race to give their customers access to a revolutionary invention that would change the way the world used cash.
No more stuffing it in vases, under the floorboards or in the mattress; banks finally discovered customers could conceivably access their cash at any time of the day or night thanks to the work of technicians who painstakingly dreamed up the Automated Teller Machine (ATM).
It was Scottish inventor James Goodfellow who was the first to patent the idea to create an ‘exotic token’ that was in fact a plastic “Hollerith” punch-card containing 30 bytes of data which matched an individual customer account, enabling access to withdrawable funds using a unique Personal Identification Numbers (PIN).
Back in the 1960s, this really was an extraordinarily complex proposal. And it was one that the banks were betting on rolling out to around two million people using 2,000 machines.
Goodfellow had painstakingly considered the use of biometrics; including fingerprints, voice prints or retinal scans to bring unique security to his idea – but with technology not as advanced as his brain was, it took a few decades for that to become an actual reality.
However, his user-friendly idea – and his eureka PIN moment – went on to spark a global boom for banking and the economy, giving the public immediate access to their funds for the first time in history.
Fast forward five decades and in 2018, it’s pretty much true that innovation is born of necessity – and that we’re currently on a crazy rollercoaster ride to the next level of financial tokenism thanks to the explosion of cryptocurrencies.
Crypto isn’t exactly what you’d call your average movement in history; it’s pretty clear that there’s an insurgency underway sparked by disruptive technology and a desire to make money easier to use – and without the use of paper.
Crypto has been in development for decades but the moment of crystallisation came nine years ago when mysterious Japanese inventor (or group of inventors) Satoshi Nakamoto launched the world’s first decentralised digital currency.
Early adopters of cryptos, like the Quantics founder Martin Frohler, say the claims of a catastrophic meltdown are completely wild.
The idea was an open-source platform that allowed peer-to-peer transactions to take place between users directly, without an intermediary. Bitcoin was born.
Nakamoto ‘mined’ his ‘genesis block’, a continuously growing list of records, linked and secured using cryptography – and it has gone on to completely transform the art of money as we know it.
Nakamoto, who has never been publicly identified, embedded text in the coinbase of his ‘blockchain’ that read: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” a reference to fractional-reserve banking, not to mention two fingers up to Government rules, regulations and traditional infrastructure.
In 2017, massive influxes of funds to bitcoin and other copycat currencies saw the idea become mainstream; prompting massive funds transfers to more than 1,500 currencies as more than 8,000 markets exploded onto the digital landscape.
That, and the resultant price volatility, has led to the inevitable talk of a dotcom-style bubble. But those put off should take a moment to consider what happened to Amazon when its share price bottomed out in 2001 before going on to become one of the behemoths of the digital age.
Preparing for change
Early adopters of cryptos, like the California-based Quantics founder Martin Frohler, say the claims of a catastrophic meltdown are completely wild.
“Cryptocurrency is the most important invention since the internet – and it is certainly here to stay,” he said as he headed to Paris where chatter has been invigorated by former Rothschild banker and President Emmanuel Macron’s approval of fintech engagement.
“It’ll transform financial services, and how we do payments and transactions, globally.
“The invention of cryptocurrencies may well be an extinction-level event for banks. While we may be in a bubble – in the sense that a lot of projects will fail – we’re still in the very early days of crypto.
“The entire market capitalisation of crypto equals only 62% of a single stock, Apple, and less than 10% of the market cap of physical gold. Many projects are overhyped, but the next Amazon, Google, and Facebook could be born during this time as well. The coming years will certainly be very interesting indeed.”
People point to the dot-com bubble as a scare tactic, but it did not chart the end of the world – far from it.
There is absolutely no doubt at all that the concept has taken traditionalists by surprise, with banks now scrambling to work out an investment strategy.
And while bank leaders like Jamie Dimon and the Royal Bank of Scotland’s Sir Howard Davies have employed attention-grabbing methods to warn consumers, they have been forced to sit back and watch as a significant amount of younger customers make increasing demands to access the market.
Analysts are waiting for the arrival of Goldman Sachs with the principal of the strategic investments group, Darren Cohen, setting up the desk.
Meanwhile, JP Morgan is turning up the heat, teaming up with the Royal Bank of Canada and Australia and New Zealand Banking Group to launch a blockchain called QUORUM that it calls an “enterprise-focused version of Ethereum.”
Naturally, hedge fund managers are lining up to make major returns, too. Last year, Altana Digital Currency Fund made a 1,496% gain from bitcoin and is also raking in between 3%-21% annualised interest from lending bitcoin to short sellers.
Meanwhile, fintech-focused Silver 8 Partners has coined in 750% from its bull/bear approach to securities while at the same time ploughing cash into start-ups working on digital asset development.
With so much focus being placed on crypto from banks, institutional investors, and ordinary members of the public, as well as the arrival of the futures market, talk of a market meltdown is exaggerated, says professor Jeremy Stubbs of the ESCE International Business School in Paris.
“Over the past month alone we have seen a flurry of Initial Coin Offerings that will certainly have some impact on pricing,” he tells HEDGE.
This technology and these currencies are here to stay and they are only going to become more popular as more and more choice becomes available
“Regulation talk will also impact what happens, but you just have to look at the year’s charts to see that crypto currencies are soaring in popularity.
“It’s a basic principle that markets will not always soar, of course, but what is interesting is the diversity of products and the continued hunger for the market.
“People point to the dot-com bubble as a scare tactic, but it did not chart the end of the world – far from it. These are young markets, and of course there will be losers but total wipeout is unlikely.”
Even in the British corridors of power the idea is catching on like wildfire, with Baroness Mone of Mayfair engaged in an Initial Coin Offering alongside her partner Douglas Barrowman.
The firm EQUI offers investors 70% of profits generated from projects they are involved in and 5% returns for those who leave their tokens in the platform.
That project is tied into a luxury apartment complex they’re building in Dubai, which has fully embraced the concept having launched their own blockchain-based cryptocurrency.
While Vladimir Putin is pushing ahead with plans to launch a government-backed currency alongside Canadian Russian Ethereum Foundation founder Vitalik Buterin, other countries like Switzerland are accepting tax payments in crypto.
No turning back
This technology and these currencies are here to stay and they are only going to become more popular as more and more choice becomes available.
Fred Montagnon is founder of the US-based Legolas Exchange, a full stack exchange built by fintech insiders working with institutional investors eager to enter the crypto market. He said: “There are two main reasons why we got such a good feedback by regulators on our ICO. The main one is the overall quality of the project, which is to bring transparency in fairness in an opaque industry.
“I think that the regulator understands the need for projects like Legolas Exchange, which helps the cryptocurrency market to become clean and viable in the long term for sophisticated investors.
“The second reason is the open dialogue and conversation that we’ve had with the AMF – the French equivalent of the SEC – which proved our good faith in building a compliant service.”
With consumers warming to the idea that they could spend their digital wallets at some of the world’s biggest brands like McDonald’s, Subway and Expedia, crypto might be nine years old but it’s really only the beginning. This is likely to be one of the most interesting shake-ups in the industry since the introduction of plastic to the paper cash market…
Q&A: David Merry, CEO and Chairman, Investoo Group
The Investoo Group is the world’s biggest performance marketing company specialising in the forex, crypto and finance industries. Since it launched in November 2016, the company’s revenues have increased from £20,000 a month to a record £12m in December 2017.
CEO and chairman David Merry began his career at a search marketing agency and went on to form Right Casino Media, which was sold for $9m in 2015. Merry then founded Kinetic Investments, which helps grow start-ups. Kinetic has a portfolio of five companies, including Investoo.
What’s going on with regulation?
Some countries are being more cautious than others, but regulation was inevitable and is also a positive step. Governments worldwide are looking at how they can make accessing the market safer for those who wish to buy and sell cryptocurrencies. By making accounts transparent, they will be able to, for the first time, identify rogue traders and criminals transacting large amounts of funds. While it’s negative for criminals, for ordinary members of the public, it could actually be a good thing.
Off chain, what’s happening out therein the real world?
Cryptocurrency is driving growth in economies and, whether traditionalists like it or not, the sector is creating jobs and that’s positive. I am of the view that job creation and investment is good news, even if in the short-term regulation and public misconception impacts pricing. For example, South Korea is banning foreigners from opening accounts, after Chinese traders flooded into the market when the government muted the idea of a ban.
There will be volatility and swings ahead because we are in wild west conditions but I don’t think an outright ban will happen anywhere; it’s too late for that.
The technology has been built. Prohibition doesn’t work and free markets are fundamental to our existence. I think policy makers and politicians are aware of this.
Putin is ahead of the game and is trying to mainstream smart contracts across Asia, Eastern Europe, Africa and South America
But isn’t the market underpinned by criminal activity?
At the World Economic Forum in Davos, Theresa May said the UK Government is developing a plan to prevent fraud. Criminals will always develop complex and rudimental ways to circumvent the laws, for example Britain’s first Bitcoin heist in January which highlighted the need for asset security. But the UK Government is being positive. For example, we know they have been actively looking at how they can apply collaborative governance to provide the same levels of trust for those who invest in traditional markets.
What about hacking?
Most people working in crypto want it to work, and while there’s elements of criminality, hacking is a global problem not just limited to this market, and law enforcement is ready to step in. Japan, where crypto is used in the mainstream, is clamping down on exchanges that are not protecting their customers. They are making those responsible pay those defrauded back in Yen. It’s interesting that they are not frightened to say they will come down on those who don’t protect customers. That’s only to be welcomed.
So it’s popular, but just how mainstream is crypto?
Cryptocurrency is creeping slowly into the mainstream all over the world, and while most people haven’t invested yet, it’s only a matter of time before they do. Just 7% of Brits are thought to have invested so far, according to our most recent research published on our website coinlist.me. While Bitcoin first really exploded on the public’s conscience last year, we really are only at the beginning of what is certain to be an industry that revolutionises finance. The underlying blockchain technology is becoming more and more advanced. Everything from business transactions to parents paying their children’s pocket money will be shaped by this in the future. Brands like eBay, Microsoft and McDonald’s will soon have the technology to accept Bitcoin and other digital currencies. Dubai wants to become the world’s first ‘blockchain city.’ It’s only the beginning.
How are central banks engaging?
We’ve heard the first positive noises, particularly out of Europe. European Central Bank chief Mario Draghi recently invited questions as part of a Youth Dialogue summit. The ECB and the European Commission has been actively engaging with the public and we know from our own research that young people are the most engaged. Vladimir Putin was an early adopter of Ethereum, his central bank is exploring the potential of an international tie-up with countries whose economies were badly affected by the GFC. He’s teamed up with Ethereum founder Vitalik Buterin and is connecting with the US, India, Israel, Armenia and Turkey about their blockchain and cryptocurrency initiatives.
Putin is ahead of the game and is trying to mainstream smart contracts across Asia, Eastern Europe, Africa and South America. There may be talk of a bubble but you just have to look at the tech companies that came out of the dot-com bubble unscathed to see that the market always produces winners.