History, present and future of the cryptocurrencies

cryptos

More than 14 years ago, Bitcoin made its first public appearance in the financial system. Since then, we have observed a lot of changes in the world of cryptocurrencies. There is still an ongoing discussion about the success or failure of these assets. However, in this post we will avoid this discussion to see how we got to this point. Once we have a clear vision of this part of the history, we will have better tools to analyze the future of the cryptocurrencies.

For this analysis we will have in mind both their current risks, as well as their achievements and threats. The final result will be very linked to each country, so we will extrapolate our conclusions. Moreover, the uncertainty about the impact of CBDC and the metaverse makes even more difficult any prediction. Despite of that, the historic analysis will be very useful to understand the current context and how we came to it.

Conception

Bitcoin was born at the end of 2008. It was the first cryptocurrency and became the first project which used a DLT technology such as blockchain. For the first years Bitcoin did not gain any trust neither among investors nor financial authorities. The technology was not reliable enough and there were no guarantees of a serious project. In fact, the price of Bitcoin did not reach $1 until three years later of its launch. This is quite illustrative of the lack of trust among investors.

future of the cryptocurrencies

Some years later there were other projects which took their place in the cryptocurrencies ecosystem, such us Ethereum, Cardano, etc. These cryptocurrencies helped to bring the attention from the retail investors, and they started to invest money in the cryptomarket. However, the use case of these assets was quite limited. The cryptocurrencies were great to invest in, but they had no added value in the financial industry. In fact, the companies willing to accept them as a payment method was minimum, and almost anyone used them for anything else than investments.

However, the incredible performance of Bitcoin began to attract the media. The main authorities were still showing themselves skeptical about cryptocurrencies, but the users and investors were growing. On the other side, by this time (around 2015) some of the most severe frauds in the history of the cryptomarket took place. Several exchanges became bankrupt due to the financial looses of their clients. This situation caused even a higher worry for the financial authorities, and some countries banned any activity or service related with the cryptocurrencies.

With an increasing number of investors, the first technical problems of the cryptocurrencies appeared. The community started several internal discussions about the scalability of these assets and the efficiency of their consensus algorithms.

Current status

For the last five years the popularity of the cryptocurrencies has been clearly increasing. Thousands of projects have been born, and some of them are now serial competitors of Bitcoin in terms of usability and acceptance. Additionally, several of them are not only payment methods, but specialized platforms to deploy decentralized applications. Ethereum, Cardano or even Polkadot are the most representative projects of this group.

history of cryptos

This growth of the number of projects is simultaneous to the appearance of the so called institutional investors. They are big companies and financial institutions which are really staking a lot of money on the growth of cryptocurrencies. Additionally, the number of companies which accept them as payment methods are also growing. Other companies, on the other side, are developing projects to provide services related with these assets.

These new participants in the market of cryptocurrencies has caused a high peak in the activity and the performance of their valuations. In fact, there has been a lot of rumors about a bubble in the price of Bitcoin. In terms of technology we have observed some great achievements. Some new wallets have been developed to guarantee the safety of the users, as well as more efficient consensus algorithms. Additionally, the creation of the payment channels has allowed to improve the scalability of these assets.

Last but not least, in terms of regulation we have also observed some significant changes. China has decided to ban all the activities related with cryptocurrencies, but this decision is not a general trend. In the Euro Zone there is a draft of regulation for the crypto assets and some countries as El Salvador have decided to declare Bitcoin as an official payment method. This situation, which was absolutely unfeasible some years ago, allows certain optimism around cryptocurrencies for the future.

Identity crisis

However, part of the current status of the cryptocurrencies may be identified as an identity crisis. Attending to the goal of becoming the currency of the people, the cryptocurrencies are far from the finishing line. Bitcoin has been the only one which has been close, at some point, of achieving that, but it has not been definitive.

In fact, what we have seen is a change in the underlying ideology. The cryptocurrencies have suffered many difficulties in terms of acceptance and regulation in their way to become payment methods. Due to this, they have reoriented themselves as investment products, where their success is out of any doubt. The volumes of invested money and their performance are the greatest attractive for these instruments. Additionally, their low correlation with other assets turns them on a good opportunity for some types of investors.

It is important also to have in mind the appearance of CBDC. These currencies would eventually complement the cash money using the technology of the cryptocurrencies but maintaining the control of the issue. Therefore, these currencies would probably become an opponent for the cryptocurrencies with institutional support.

Last but not least, we have seen how the idea of cryptocurrency has grown over time. It is not anymore a currency with a digital and decentralized conception. We have now added the NFT, very used in several types of applications. Moreover, the stable coins and the CBDC can presume of removing some of the disadvantages from the traditional cryptocurrencies, and their relevance is growing in the industry. All this has caused a great impulse for the cryptocurrencies sector, at the expense of diluting their original significance.

Future of the cryptocurrencies

If we look ahead, it will be very important to know the consequences of the previously mentioned identity crisis. As explained, it can bring many benefits to the industry, but simultaneously it can move away their initial goal. In any case, we must recognize that the growth of the cryptocurrencies has been by far higher than expected. The cryptocurrencies has settled (probably for a long time) in the financial industry. It is not anymore an asset exclusive for retail investors, and the number of companies which use them in any way is getting higher over time.

Additionally, the relation of these instruments with other technological innovations as the metaverse can keep impulsing their use. Therefore, it is important to acknowledge their achievements. Moreover, the number of sectors which have benefited by the cryptocurrencies is already quite significant. For the retail investors, many of them already consider Bitcoin as a safe investment at the same level than the gold, to protect against inflation pressures.

For all this, it seems that the cryptocurrencies have come to stay. It is not likely they can replace the fiat money as a payment method, but their relevance in the financial industry will keep growing for sure. In fact, their integration with other innovations of the private sector is something that will affect several industries, not just finance. From the institutional point of view, it is expected a higher regulation. This regulation will help to bring better transparency, publicity and security to the cryptocurrencies, which will locate them where they really belong.

Conclusion

The history of the cryptocurrencies is still too short to be judged properly. They exist since barely fourteen years from now, which is not long enough to evaluate their impact, although it seems clear that they have a promising future. The development of the regulation around them and the success of the projects will either justify the good expectations or confirm the worst predictions.

Bitcoin in El Salvador

In this sense, the new projects have tried to remove the initial limitations of the first initiatives. The lack of scalability, the safety of the algorithm or the centralization of some projects are some of these limitations. Additionally, the appearance of private projects offers the possibility to apply the blockchain technologies in environments where the users/owners have a bigger control of the platform. This allows a much better flexibility to both private companies and public institutions.

However, despite the growth potential of these instruments, it is also true that this potential must be exploited. This implies that some initiatives as the one launched in El Salvador must work, because if they do not succeed, it would mean a clear regression. We must have in mind that the cryptocurrencies rely much of their success in the trust of the users, which is one of the main consequences of decentralization.

Therefore, a further monitoring will be needed in the upcoming years, specially at a regulatory level. This will prove if the cryptocurrencies finally can succeed or if they remain as another investment asset (which will not be so interesting if the underlying technology become stagnant.

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