Failure or success? 14 years with cryptocurrencies

bitcoin, ether, ripple

Introduction

At the end of 2008 Bitcoin was presented through its whitepaper as the first cryptocurrency in the world. The absence of any central authority in its design meant that Bitcoin became known as the “cryptocurrency of the people”. The goal was to allow transactions in a fast, cheap and easy system thanks to the blockchain technology. Today, the discussion about failure or success of Bitcoin is still present.

After the appearance of this cryptocurrency we have seen many others. Some of them shared the same goal, while some others were focused on providing access to certain services. For some use cases, the platforms used the tokens they created to engage their clients with exclusive offers within the network. After 14 years of the first project, we analyze whether we can consider as success or failure the cryptocurrencies, their goals and their challenges for the following years.

Analysis elements

There are no doubts about the advantage of cryptocurrencies for being purely digital against the physical nature of the fiat money. Moreover, thanks to their blockchain technology, there is no need of any central authority, so the control remains in the users. However, there are a lot of cryptocurrencies which have adapted their implementation to different goals and more specific functionalities.

Therefore, we should not compare Bitcoin with CBDC. The latter are issued and controlled by the Central Banks, and the use cases are not comparable. The underlying technology may be similar but it will have for sure significant differences in terms of privacy and security. That is the reason why we will focus on the classic concept of cryptocurrencies. The elements to analyze both their current development and their future potential are as follows:

bitcoin

Security

Bitcoin justifies the security of its network on the strength of its consensus protocol, as well as other cryptocurrencies do. In this sense, both the Proof of Work and the Proof of Stake appear as highly reliable alternatives. At this point, these protocols have not suffered any double spending attack or similar. In fact, most of the attacks that took place were headed to the source of the cryptocurrency, not in the protocol itself.

However, this is not the type of security we should be worried about. The main concern about the security of the cryptocurrencies is related with the exchange platforms. This is where most of the attacks usually take place, and it compromises not only the money of the clients but also their trust. Additionally, the vulnerabilities of the source code of some cryptocurrencies turn the security as the most important element to improve in the future.

There are many examples of these attacks to several cryptocurrencies, and even in the case of a limited loss, they put in jeopardy the trust in the whole system. Moreover, we should have in mind the weakness of the accounts, where in most cases the final user is the only keeper of the access keys. These keys are the only point of access for the founds, so if the keys are lost, then the found will be lost also. In the traditional system this situation is not possible thanks to several protection mechanisms which the institutions support.

Scalability

The capacity of the DLT networks to be scalable is also a concern since the conception of the cryptocurrencies. This is something that affects directly to the management of new transactions when the demand or the number of users increases. Therefore, scalability is a key aspect when we talk about assets with a potential clients base of millions of people.

In this sense, we have observed several improvements. Among them we may highlight the “Payment Channels” or the “Sharding”. These systems try to find different ways to make easier for the network the management of new transactions. Some of these improvements are present in Ethereum 2.0 or Bitcoin with Lightning Network.

Scalability trilemma

It is true that several innovations have improved the management capacity of new transactions, but this is not enough. The difference with the traditional payment systems is still too high, which adds uncertainty about the future of cryptocurrencies as global payment methods. For these systems, the scalability is absolutely mandatory.

Additionally, due to their configuration, the scalability can only grows at the expense of other elements. Both the decentralization and the security are equally important elements. This difficulty to improve the three factors simultaneously is a huge challenge for the community of developers. In fact, the way the different projects deal with this difficulty makes the real difference among the different type of cryptocurrencies. This conflict is what we know as the Scalability Trilemma, and Vitalik Buterin, cofounder of Ethereum, was the first person to talk about it.

Acceptance

This is probably one of the elements for which the cryptocurrencies have backed their growth with more strength. These assets were not welcome at the beginning, but they have being gaining in popularity over the years. As an evidence for this, the number of companies or even countries in which the cryptocurrencies serve as payment method has keep growing.

The highest proof of this acceptance comes from El Salvador. This has been the first country in accepting Bitcoin as an official payment method. Some months later, the Central African Republic took the same steps. On the opposite side we may find countries such as China or Turkey, who forbade these assets. What they tried is to maintain them out of the national economic flow, but the truth is that the access is universal.

bitcoin salvador

However, it is important to remember that Bitcoin was not created to serve as a mere investment asset. The real goal was to become a truly payment method, and this is something they did not achieve but in very few cases. In the private sector there are a lot of companies who accept cryptocurrencies, but their use is quite low. Almost every transaction has speculative intentions, instead of serve as payment system. This implies that the level of acceptance is high due basically to the good performance as an investment asset.

Performance

As an investment asset which the investors use to trade, there is no doubt about its success. Since their conception, the cryptocurrencies have grown in capitalization, number of instruments and number of daily trades. The number of investors has also grown (both retail and institutional), as well as the number of exchange platforms.

Moreover, the higher number of institutional investors has allowed a professionalization of the investment and the industry. This means more ways to trade in cryptocurrencies through different products. Here we can mention the ETFs, options, trackers, etc., which are complex products that need a more mature market. Therefore, independently of the future situation, we can say that the cryptocurrencies market is much more mature now than 10 years ago.

Regulation

Regulation is another element where there is still a high margin of improvement. Until now, most of the authorities over the world have shown a cautious attitude against the growth of cryptocurrencies. It seemed enough to advert the investors about the risks and the intrinsic volatility of these assets. Even in the case of money laundry, the regulation was quite limited.

Moreover, it is important to have in mind that the growth of the industry requires, at this phase, a proportional growth of the regulation. Now that we see the link between the metaverse and the cryptocurrencies, an appropriate legal frame is necessary.

In this sense, the inclusion of the cryptocurrencies in the regulation of the financial systems over the world will help to develop a stronger and more mature market. This does not mean that they should be banned (this is also a from of regulation), but they should be addressed at least. Each country will decide the legal approach, but the fact of having their own regulation means already a starting point for the investors.

In fact, it is likely that the frauds decrease, as well as the number of financial stalls, which take benefits from the lack of regulation. Furthermore, the money laundering will also decrease, which are always good news for any country.

Current regulations

Over the last years we have witnessed a small change of trend in Europe with the appearance of several regulations. Among them, we can distinguish the regulation for Markets in Crypto Assets (MiCA is the acronym). The European Authorities have also launched a Pilot Regime program for companies working in DLT projects. This will probably bring more changes, which are needed for the calm of the regulator and the trust of investors.

MiCA EU

It is also important to have in mind than the Central Banks are currently working on developing their own CBDC. Although these currencies are not pure cryptocurrencies, they can contribute to the definition of this kind of assets. However, a lot of countries are facing unexpected difficulties, as the lack of qualified professionals. Due to the short experience with these assets, there are not enough professionals with the required level of knowledge. This makes difficult the preparation of the legal framework, specially for a such changing asset as the cryptocurrencies. Here you can check the current status of the regulation on cryptocurrencies over the world.

Failure or success?

With this information, it seems that the cryptocurrencies have not yet achieved their main goal. They hardly serve as payment method and just El Salvador and Central African Republic recognize them officially. These two countries don’t have enough economic development to measure the impact, but it is a relevant fact. The international institutions keep sending alarmist signals, which discourages the rest of countries of doing so. Furthermore, the use case of cryptocurrencies remains basically as investment assets.

The main challenges of cryptocurrencies, which are the security and the scalability, remain unsolved. The truth is that there have been some improvements, but not good enough in comparison with the traditional payment systems. However, it is true that the interaction of these assets with other technologies such as the metaverse can become an impulse. The higher the importance of cryptocurrencies for the society, the bigger their chances to succeed.

In terms of regulation the margin of growth is really significant. The appearance of CBDC, although can become a rival for cryptocurrencies, will be helpful.That is one of the reasons why it does not seem very likely for the cryptocurrencies to dominate as payment systems in the mid term. However, they will for sure gain relevance and grow as investment instruments.

Conclusion

We cannot talk about success of cryptocurrencies if we measure that by the fulfillment of their goals. However, they hay grown more than enough to recognize their impact in the financial system. They have impacted in several industries, and they are different enough to cover very different use cases. If we link this with their decentralized ledger technology, they become a very relevant asset.

Therefore, we can expect for the future a higher level of maturity and acceptance and, consequently, a better integration with the financial system. Maybe we cannot talk about an absolute success, but for sure they are not a failure, at list, at this point of the industry.

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