The Future Of Cryptocurrencies

2017 has been a wild and fantastic year for cryptocurrencies, especially bitcoin. Everyone was wondering whether they should buy bitcoin. That was back when it was $500 a coin. Now it’s over $11,000 a coin. Funny year 2017. 2017 was when everyone thought they had to get into cryptocurrencies, and you realize that they don’t get it when they decide not to buy bitcoins as they’re $11,000 each; let’s buy Litecoins instead, as they’re just $100 (at the start of year $2).

What this mad speculation has done is stoked the formal markets into action. After Jamie Dimon calls it a fraud and Nobel prize-winning economist Joseph Stiglitz has called for it to be outlawed. Nearly every banker I talk to things it serves no useful function, and is purely used to avoid governmental authorities and engage in criminal activities.

That overlooks one fundamental: bitcoin is popular in markets where their fiat currencies are unstable, such as Venezuela and Zimbabwe. Alternatively, where governments try to restrict the outflow of domestic currencies, as in Russia and China, cryptocurrencies provide a desirable alternative. Equally, it is popular in markets that have zero interest growth, such as South Korea and Japan. In these markets, the lack of a decent return on investment drives investors to look for alternative asset classes of which crypto is definitely a decent one, at the moment.

In other words, bitcoin is becoming a mainstream asset class for some markets, including the USA where the Chicago Mercantile Exchange and Nasdaq are crating crypto derivatives based on bitcoin. What happens next? Well, I was intrigued by the commentary of Christine Lagarde, the Head of the International Monetary Fund (IMF), and someone I take quite seriously. She has spoken out several times recently to say that ignoring bitcoin and cryptocurrencies is dangerous. In fact, her latest commentary is that the rise of these alternative currencies could replace the banking system.

Her full speech to the Bank of England at the end of September can be read on the IMF’s website, but here are few key lines:

Virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators, and some have been hacked. But many of these are technological challenges that could be addressed over time.

According to Lagarde, cryptocurrencies could play a future role in updating the IMF’s own internal currency, a reserve asset named the Special Drawing Right (SDR), and she believes it will deliver “massive disruptions”. She’s not the only saying this, but the question then is: what should central bankers do about it?

Bloomberg summed it up well:

U.S.: Privacy Worry

The Federal Reserve’s investigation into cryptocurrencies is in its early days, and it hasn’t been overly enthusiastic about the idea of a central-bank issued answer to bitcoin. Jerome Powell, a board member and the chairman nominee, said earlier this year that technical issues remain with the technology and “governance and risk management will be critical.” Powell said there are “meaningful” challenges to a central bank cryptocurrency, that privacy issues could be a problem, and private-sector alternatives may do the job.