PODCAST | The cryptocurrency conundrum
For cryptocurrencies to gain more acceptance, people need to see value in participating in the underlying economies of blockchain technologies
Cryptocurrencies have had a torrid time, with headline currencies bitcoin and ethereum crashing last year.
Is there life in the crypto market yet? And can blockchain, the technology that underpins cryptocurrencies, grow in usage?
Chris Becker, blockchain and cryptocurrency expert at Investec, talks about why cryptocurrencies are so volatile and why they can only go mainstream if people start recognising the power of blockchain and using this technology more widely.
A volatile asset
Cryptocurrencies’ volatility is a function of their illiquidity, which is, in turn, a function of the still low levels of adoption of blockchain technology. Just as ordinary currencies provide access to the economies of the countries that issue them, so cryptocurrencies provide access to the economies of the technologies that underpin them, namely the specific blockchain technology of each.
However, as Becker points out, about 0.2% of the world’s population uses blockchain technology presently, putting it on a par with some of the world’s most illiquid currencies. One would expect these currencies to be volatile, so it should not be a surprise that cryptocurrencies have been as such a rollercoaster ride.
Read more: Blockchain: the invisible engine of trust
How can cryptocurrencies become more accepted?
Becker says that in order for cryptocurrencies to gain more acceptance, people need to see value in using them and participating in the underlying economies. Cryptocurrencies have no borders, so one application could be in countries suffering from a financial or monetary crisis (like Venezuela or Zimbabwe), where there is a loss of confidence in the local currency and a lack of access to foreign currency.
Cryptocurrency (or tokens) can step in, for instance, as a way to borrow or raise dollars in exchange for cryptocurrency. The widespread application of this in these situations is probably a few years away though, argues Becker. Further down the track will be its acceptance in countries with more developed and stable financial systems. In time, Becker believes, it will disrupt any centralised, closed-loop financial system, in the same way that the internet disrupted older closed-loop communication and content distribution systems.
Blockchain without cryptocurrency?
Experiments to take cryptocurrency out of blockchain applications – through a distributed ledger system – have been suboptimal, argues Becker. “This moves away from the decentralised, unrestricted nature of blockchains. When we talk strictly about blockchains, the currency is a critical component, as it incentivises the provision of security, which is at the heart of the technology.”
Becker says some of the most interesting applications of blockchain have been on the smart contract front. A smart contract is a digital protocol that facilitates, verifies or enforces an underlying contract. In the example above, tokens issued in this way (such as on the ethereum platform) can be used as collateral to borrow US dollars or for other types of loans. Tokens can also be traded with other types of assets, with no intermediation required.
So for example, one could buy tokens that give the holder a share of some real estate in the US, including the underlying income from that. This would also be traded on the secondary market through a smart contract platform. Becker says there are some exciting developments on this front. “When institutional money starts to understand what’s going on out there, you can expect to see more capital being allocated to funding innovation in the blockchain space."
Integrating with other technologies
Currently, power is concentrated in the hands of firms that control Big Data. The big social media firms are happy to make their APIs available to external users, but can easily shut down users when it suits them. This would not be the case in a decentralised data world – because blockchain is a decentralised platform, one exciting development of its growth will be increased access to large data sets. However because blockchain usage is so low at the moment, such a scenario is still some way off, says Becker, so it’s more a case of “small data” benefitting from AI insights in “big data” centres at this point. That will change in time, however.
What Investec is doing
Becker and his team are researching blockchain technology to see how its application can change the "plumbing" of the financial system. “We’re spending a lot of time analysing trends and developments with a view to positioning ourselves to offer value for our clients, should the technology become more mainstream,” he says.
What do I need to know if I want to get involved in cryptocurrencies for the first time?
Apart from recognising how volatile cryptocurrencies can be, Becker highlights the fact that there are few proven and trusted custodians of these assets and no legal recourse to technology failures. Your asset is secured only by a string of numbers and letters that make your password – if you lose that or someone gets access to it, you risk losing the asset for good. And you have no recourse to your funds, as you might have when, for example, you are the victim of fraud on a traditional bank account.
The original article appeared on Focus, Investec’s content hub.
Patrick Lawlor is editor at Investec.
This article was paid for by Investec.