It’s been hard to avoid the cryptocurrency headlines over recent weeks. At time of writing, a single Bitcoin – the original cryptocurrency – is valued at $17,250; up in excess of 1000% in 2017 alone. As Time explains, all the Bitcoins in the world are currently worth more than the GDP of New Zealand. Not bad for an eight-year-old.
But it’s not just Bitcoin that is experiencing massive growth. Other cryptocurrencies – for example, Ethereum, Ripple and Dash – are also delivering healthy returns. While some market commentators are (quite sensibly) warning potential investors that the cryptocurrency market could just be bubble that’s ready to burst, it’s apparent that governments, banks, financial regulations, as well as commercial and individual investors, are increasingly investigating how they can participate in the market.
So, could 2018 be the year that cryptocurrencies become truly mainstream?
Shaking off shady beginnings
A major barrier to market entry is that cryptocurrencies have an image problem that they still need to shake off. Originally synonymous with the Dark Web, tax evasion, money laundering and funding terrorism, it’s taken a while for legitimate organisations to begin to see past these dubious beginnings and trust them as an investment opportunity.
This is still very much a work in progress. Initial Coin Offerings (ICOs) of new currencies remain a mixed bag. The lack of regulation around ICOs have lead some commentators to liken them to Ponzi schemes. The US Securities & Exchange Commission (SEC) shares some of these concerns, and has vocally warned against ICO scams.
Reports of hacks on cryptocurrency wallets are also causing nervousness among market participants. Last month’s news that $31m was stolen from a Tether Treasury Wallet was just one in a growing line of high profile thefts. While these reports have caused only temporary volatility in the crypto markets, a perception of poor security will undoubtedly limit their appeal to mainstream investors.
Of course, not every ICO is a scam and not every wallet is inadequately secured, but these instances are a reminder that not every virtual currency operator was created equal. Their modus operandi and their underlying technology infrastructures will vary greatly; the necessary due diligence should be undertaken before contemplating any type of investment, however large or small.
Regulation to bring credibility?
Digital currencies have, on the whole, prospered because they fall outside of the control of governments, central banks and financial regulators. As true global currencies, they do not recognise physical borders or trading arrangements. Essentially, this makes them incredibly hard to track and regulate.
Yet over the last months and years we have seen and increasing number of governments and regulators change from being mere observers to take a more active role. (For more on the changing of how law makers are changing their stance in the market, take a read of our previous blog: The law and the future cryptocurrency.)
Tightened regulation – such as that now being considered by the UK and some EU governments – is being driven by a requirement to update anti-money laundering legislation so it is fit for the digital age, but with it, it could also bring mainstream credibility and stability to what remains an immature and volatile market. This could help ensure its long-term appeal as an investment opportunity.
An added challenge for investors is that legislation and regulations vary considerably between political jurisdictions. Furthermore, they are in state of almost perpetual flux as law makers continue to get to grips with this rapidly emerging market. What is perfectly legal today could be restricted tomorrow, and vice versa.
Blockchain security: a driver for adoption
While it’s true that there have been some truly audacious hacks on digital wallets, blockchain – the technology that underpins cryptocurrencies – is inherently secure.
Blockchains contain decentralised ledgers of all transactions that cannot be amended or deleted; this makes theft or fraud impossible. In contrast, traditional banking systems, which are often based on legacy technology, are firmly in the sights of hackers. This is perhaps one of the reasons why the Australian Stock Exchange is replacing its current clearing system with blockchain technology, http://abcritchlow.com/australian-stock-exchange-replaces-current-systems-blockchain-technology-bitcoin-soars-16663/.
The security baked into blockchain could be the crypto market’s greatest attribute as it strives to establish itself as a long-term investment opportunity.
2018: crypto’s year?
A year ago, I doubt few people would have predicted Bitcoin’s value would grow by over 1000% by the end of 2017. What will happen in 2018 is, frankly, anyone’s guess. However, increased interest from the regulators, coupled with mainstream financial brands incorporating blockchain technology into their day-to-day operations, might signal an hiatus in the market, with virtual currencies getting ready to move from the niche to the mainstream.
Our next blog (Crypto: asset, security or currency?) will explore how different jurisdictions classify virtual currencies and the implications this has for investors.