One of the most divisive questions asked about current investing involves cryptocurrency. There’s no doubt that the market is hot; the amount of expansion that Bitcoin went through in 2017 is overwhelming. 2018 has been no less exciting, if not a bit more volatile. For a long while, though, it did seem as though one of the most stable investments a person could make was cryptocurrency, provided that they knew what they were doing and had faith in the system.
But is that faith misplaced? While there are thousands of voices heralding Bitcoin (and its competitors) as the future of investment, there are still plenty of others that point out cryptocurrency’s rather obvious negative aspects.
Of course, if any investor had a crystal ball, they’d likely be the richest person on the planet. While nobody can tell the future of Bitcoin or other cryptocurrencies in terms of absolute certainty, there are a number of indicators signaling potential futures for this investment.
What Is the Prism of Disruption?
One of the most interesting philosophies to look at cryptocurrency through is the one put out by Katrina Stefanova, who advocates the “prism of disruption.”
Essentially, Stefanova points out that, unlike most other verticals in the modern market, investment really hasn’t experienced a lot of disruption. An example of a disrupted market is the movie/television industry with the advent of the internet. It wasn’t the internet itself that disrupted the movie/television industry because ordering DVDs or VHS cassettes through the internet isn’t that much different than renting them from the local Blockbuster. However, it was “sharing” platforms like Napster and Kazaa, or streaming services like Netflix, that really turned the whole industry on its ear. Now that we can get our video games from Steam and our movies from Hulu, who goes to Blockbuster anymore? Even traditional movie theaters have felt the pinch as at-home viewing became more relaxed and easier.
Comparatively, investment has not changed much since the advent of the information age, other than the internet can be used to buy and sell assets. But the big banks and financial institutions still control most access to these assets. Or at least, they did before the blockchain revolution started.
Cryptocurrencies are the first sign of the financial market being potentially disrupted. Just like Napster disrupted the entertainment market by allowing the customer to bypass the entertainment industry to obtain their movies and music, blockchain technology allows the investor to sidestep banks and country-backed currencies to invest on their own.
A side-result of the information age is that people can connect with each other easier than ever before, and people are more likely to go against the grain and create their own ideas and lives from technology. A good example of this would be the so-called “digital nomad,” or people who make their living through their computer and thus can travel around the world as they please, frustrating visa laws as their income cannot be easily traced.
Likewise, the free-thinkers in Silicon Valley have revolutionized what we call “currency.” Just like the digital nomad eschews the traditional means of making a living, the ones involved with cryptocurrency eschew the traditional notions of currency. The sheer worth of Bitcoin proves that all you need for a currency are people who believe in it. If not, then how is Bitcoin worth over $10k?
The dark side to all of this is that the freedom involved with ventures like Bitcoin and other cryptocurrencies often attract unsavory elements. Remember when everybody was paranoid about releasing their first name on the internet? When the internet was a new thing, people were unsure how trustworthy it was. Similarly, Bitcoin and other cryptocurrencies were originally used as currencies to purchase pornography and to gamble, which ran off a lot of legitimate investors. This, in turn, hurts the reputation of cryptocurrencies.
Bitcoin is currently the “gold standard” of cryptocurrencies, but there are plenty of others out there on the market, all with varying pros and cons. However, some forms of cryptocurrency are considered more trustworthy than others, just like some forms of hard currency are considered less trustworthy than others. There are some forms of cryptocurrencies that have turned out to be scams and those that have collapsed unexpectedly.
Additionally, since currency exchange with cryptocurrency is outside the direct control of governments, there’s the potential for money laundering or other financial crimes being committed with it. These would be much harder to track when compared to regular hard currency.
What Does the Bitcoin Future Hold?
The question that most people have on their mind when it comes to Bitcoin and other cryptocurrencies is, “So is this the new future of money or is it going to be a flop?”
The most likely answer to this question is: neither is probable. There is likely to be changes, but those changes are very likely to be institutionalized and harnessed into the new “normal.” Again, these patterns have played out in virtually any sort of technological advancement where industry is concerned, from automobile to entertainment.
1. Creation Phase
This is when the technological innovation at hand is in its infancy. People are aware of it, but it’s still a fringe idea, and it’s generally not taken seriously by the establishment. Most people will think the technological innovation is odd at this point. It’s possible that a few people experience incredible success with it (think the dot-com boom in the 1990s), but there’s also a lot of flops and plenty of shady activity going on as well. It’s likely that Bitcoin and other cryptocurrencies are coming out of this stage around this point. Most people have heard of it, and since it’s reasonably familiar, people believe others must be making money off of it somehow, but most people aren’t very familiar with the details.
2. Retraction Phase
At some point, the bubble is very likely to burst. Again, this happened with the dot-com bubble back in 2000. People were all in, and the euphoria was at a completely unsustainable level. There has been no major crash across the board where Bitcoin is concerned, though there certainly have been a fair share of failed cryptocurrencies. It is likely that there will be a crash at some point because there always is with an advancement of this sort, particularly since it’s generally unregulated due to its nature.
Basically, it is likely that the bubble will burst, but this may actually be a good thing in the long run, as it would result in a correction for cryptocurrency.
3. Institutionalization Phase
At last, the best of innovation will come together with tried-and-tested business methodology and established practices. The practices will have changed, perhaps drastically in some cases, but just because the technological advance served as a disruption doesn’t mean that the old ways have no new value.
The continued parallel with the 2000 dot-com bubble was the creation of names known around the world today: Amazon, Google, Netflix, etc. All of that energy and innovation was harnessed by people who understood how to marry the technological innovation with known business practice, and now we have these multi-billion-dollar companies. They were a direct result of the disruption created by the dot-com boom. The boom busted, and it changed the world forever.
What Will Happen to Cryptocurrency?
It’s important to note that the disruption could happen to cryptocurrency if not to Bitcoin; as we’ve mentioned several times, there are plenty of other cryptocurrencies to choose from, and it’s possible that Bitcoin may be the big name today but flop tomorrow (does anybody really remember AltaVista?).
What ends up happening with cryptocurrency depends a lot on whether it completes the disruption cycle. It seems as though there’s a good chance of it doing so, but we estimate that cryptocurrency is currently in the “creation” phase, and it’s setting itself up for a bust at some point. Overall, we believe that this bust is both inevitable and ultimately a good thing, provided that there is the institutionalization phase afterward. In the case of cryptocurrencies, this would likely mean embracing far more regulation than there is currently. More regulation would make investors feel safer and would probably help investors who aren’t tech-heads maximize their ROI with cryptocurrencies.
Assuming regulation happens, we wouldn’t be surprised to see Bitcoin and other cryptocurrencies becoming a more standard addition to investment portfolios across the board. One of the most important things to do as an investor is to ensure you have a diverse portfolio, and it’s very likely that the addition of a cryptocurrency like Bitcoin will be seen as a desirable way to do so in the future.
What is the future of bitcoin? If cryptocurrency follows the traditional pattern of market disruption, it’s likely that the future of Bitcoin is bright, but its flame may burn a little less hot by the time it makes it into the portfolio of an average investor.