LONGREAD: in defence of crypto

As a banker I can’t help but feel uncomfortable discussing my interest in cryptocurrencies; it feels rather counterproductive given the very ambition of the technology is to rewire the foundations on which the industry I work in is built. 

That being said, we live in an age where disruptive technologies are openly considered if not welcomed - and so they should, regardless of any threat it may pose to an established system. 

"The rise of the insufferable crypto-bro has been at least equal to the intolerable crypto-snob, warning others away from something they don’t understand themselves.”

So yes, bitcoin is a big deal. In a short period of time it’s gone from niche internet forums to your uncle boasting about returns on his blockfolio price-tracking app. From less than $US1,000 in January 2017, it is now worth roughly $US13,000 after coming off a December high of $US20,000 on some exchanges – volatility is clearly part of the deal.

But beyond the hype, both cryptocurrencies and their underlying blockchain technology serve many purposes and can benefit both consumers and corporations alike. The attention on the former is mostly negative, while the latter is discussed half-heartedly and not as thoroughly as it deserves.

Indeed, the rise of the insufferable crypto-bro has been at least equal to the intolerable crypto-snob, warning others away from something they don’t understand themselves.

So why all the hate? The technology is new and it’s not perfect but surely it’s worth an attempt to build on it – even just to see where it takes us. Let’s work to see how it could be utilised to benefit our institutions, as opposed to outright dismissal because the majority don’t yet gasp the concept.

Shut up and take my money

First, some formalities. Bitcoin has its flaws. There, I said it again. Not the least of which is the fact it has become too slow and expensive to achieve its initial goal of becoming a widely used digital currency.

But in the process it has paved the way for other crypto-currencies which remove these very issues.

Trading bitcoin itself has struggles, with huge network congestion, high fees and slow transaction times. But other coins have already solved this problem - for example, NEO and RaiBlocks, both faster in comparison to bitcoin (and free to transfer to boot).

It’s no secret bitcoin uses a huge amount of energy in order to mine the currency. This method of validating the network is known as Proof of Work.

But an increasingly large number of cryptos are using a method called Proof of Stake which requires no mining power at all, relying on online nodes which validate the network instead.

Even ethereum, the second largest cryptocurrency (which some speculate could soon overtake bitcoin in marketcap) is moving towards a Proof of Stake methodology.

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These coins are solving real-world issues such as the speed and cost of international SWIFT payments or even providing a viable alternative to the national currencies in Venezuela and Zimbabwe which have been plagued with unhealthy inflation

I’ll even go out on a limb and admit the level of uninformed investors flooding the market right now is concerning. When your mum expresses interest in cryptos over Christmas dinner, or your hairdresser starts talking about bitcoin with a tone of authority, you can understand why economists start to scream ‘bubble!’

While I want financial freedom for all I agree that the current market is based purely on speculation and this is unlikely to be sustainable. That speculation is inevitably finite and a combination of slowing returns, waning interest and regulations are likely to pull the price back.

It’s important too to remember that even out of bubbles, legitimate businesses and industries can arise -think of the surviving ‘dot coms’ like Google & Amazon, for instance, now dominating their markets. 

The others

Almost every article on crypto – including here on bluenotes – comes with a bitcoin flavour. This is understandable – it was the first crypto after all.

The price of Bitcoin has risen from literally a fraction of a US cent when it first become tradable seven years ago to its current eye-watering levels.

While other cryptos are starting to be discussed in more depth, Bitcoin is still the main trading pair for which the purchase of all other crypto-currencies is made possible.

With the market so dependent on bitcoin’s success it is only natural it’s given so much attention. But in 2018, this will all change.

In the short term bitcoin’s price is likely to continue its rise - providing more fiat money is flowing inward rather than outward. With its eventual limited supply of 21 million coins, the simple law of supply and demand guarantees an increase in value.

But with a limited number of human beings to invest and the likelihood interest will eventually decline, growth will reach a tipping point and eventually stifle - whether that’s six months or 50 years away.

We’ve seen bitcoin’s crypto dominance drop from between 80 per cent to 90 per cent over a year ago, to as low as 35 per cent recently.

As new money flows into bitcoin, investors are inevitably exposed to the other cryptos traded on exchanges and more people will eventually find themselves delving into the rabbit hole.

This influx of money into ‘alt’ coins will continue to surge in 2018 and as a result it’s likely the discussion will no longer be so obsessed with the ‘king’ Bitcoin.

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Like death and taxes, regulation is inevitable for any new product or service in the financial services industry and for something as revolutionary as blockchain and crypto this is naturally taking some time.

With a recent market cap high of close to $US800 billion it’s clear we’re now dealing with big money at both institutional and retail level. What that means for the regulators, governments and other major financial institutions which influence legislation is they need to be careful if they are truly concerned about protecting the consumer.

It’s clear to crypto traders today with accusations of manipulation, both by ‘whales’ (investors with enormous balances) and by trading bots, that some form of regulation surely can’t hurt.  But if a group of governments came together to ban the trading of crypto-currencies and make crypto exchanges illegal it would only hurt the consumer instead of protect them.

Crypto will still be able to be traded outside the normal tracking processes of traditional banking, as by nature it is decentralised. This will likely have the unintended effect of driving crypto traffic underground even further. Panic selling will drive large losses for the people the regulators are designed to protect. 

A considered approach is required.

True believers

Crypto is here to stay - in one form or another. But don’t just believe me – why not listen to some other former sceptics now among the true believers?

Jamie Dimon - CEO of JP Morgan-Chase - initially called those investing in bitcoin “stupid” before later (and somewhat suspiciously) changing his tune, admitting he regretted making the comment.

Now his bank is experimenting with blockchain technology.

Mark Cuban, multi-billionaire investor who previously laughed at Bitcoin now recommends people hold a small percentage of it to maintain a well-diversified investment portfolio -and is actively investing himself in ‘ICO’ crypto-currency crowd sales.

Mark Zuckerberg, one of the wealthiest people on the planet, publicly shared his favourable thoughts on crypto-currencies and interest in blockchain technology to his two billion Facebook users.

Like these successful businesspeople, we should ultimately start to focus on the positive side of crypto and blockchain tech – it is unique, offers financial freedom to those in countries without it and showcases the most innovative, revolutionary disruption to the status-quo not seen since the inception of the internet.

So one day when your grandkids come home from school asking what it was like to live through and experience the crypto revolution, will you excitedly tell them how you embraced it during its infancy or explain why you didn’t? For better or worse.

Steve Dando is a Personal & Business Banker at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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