Low on trust and high on volatility: Can Bitcoin find a reason to exist beyond shady transactions?
Bitcoin’s next big upswing is only possible if the cryptocurrency becomes a mainstream currency, rather than a niche payment system.
“The initial hype is over for now,” John-Kurt Pliniussen, Queen’s university expert on internet marketing and digital trends, said. “I don’t think it’ll go up again until there is more demand for the average consumer to use it,” Pliniussen said.
The currency continues to suffer from a mix of regulatory and application issues that is eroding investor, and user, confidence.
“Cryptocurrencies, to date, cannot be considered a safe store of value compared with cash,” investment bank Barclays Bank Plc said in a report published Tuesday. “Further, theft of Bitcoin through hacking, scams and ransomware has surged.”
The cryptocurrency is the most-high profile of hundreds of digital coins built on the innovative blockchain technology, and became a retail investor phenomenon as prices surged last year, exploding to US$19,000 in December. But the currency has lost around 65 per cent of its value since then, trading below US$7,000 this month, after suffering one of its biggest quarterly losses in the first three months of the year.
Barclays’ report predicts the ceiling of cryptocurrencies to be between US$600 and US$780 billion, equivalent to the peak sum of market capitalization in January this year.
“Our estimation of long-term value focuses on the monetary and store of value needs of low-trust sectors of the global economy: weak, underdeveloped states and global criminal enterprise,” the bank said.
Others say the cryptocurrency and its rivals remain a maturing market, although they are still looking for a clear reason for existence.
“The original idea was a means of payment, and that’s pretty much gone,” said Thorsten Koeppl, associate professor in the economics department at Queen’s University.
Another key Bitcoin attraction was its extremely low transaction fees, but the opposite is occurring right now — transaction fees are very high.
Investors, burnt by the currency’s volatility, are more cautious amid the crash, says Cole Diamond, CEO of Coinsquare.
“People are now doing their research on what they’re buying especially compared to late 2017,” Diamond said.
Toronto-based Coinsquare is a trading platform for Bitcoin, apart from other cryptocurrencies Litecoin and Ethereum, and plans to add Ripple to its roster very soon, even as prices of all the currencies plummet.
The market was in “absolute euphoria” in December and the number of people who are in the market is greater than it has ever been, Diamond said.
“If you look at the price of Bitcoin even though it’s down in 2018, if you look back a year it’s up 600 per cent,” he said, noting that Coinsquare itself is more than 100 times bigger than it was a year ago.
But regulatory scrutiny has come to Canadian crypto exchanges, with Ontario security regulators launching a probe into the market, according to a Globe and Mail report last week.
Diamond says Coinsquare welcomes regulations as a lack of guidelines pose a public risk, but declined to comment on how the scrutiny impacts his platform.
“It should be up to this sort of regulator to go as quickly as possible to figure out how they can be sure protocols are in place to protect those that they’re responsible for protecting,” Diamond said.
Even as regulators come down hard on the nascent industry, advertising bans on social media has also contributed to the downfall, says Diamond.
Alphabet Inc., Facebook Inc. and Twitter Inc. have all started restricting advertising of cryptocurrencies, while a number of Asian governments have spoken out about the dangers of trading cryptocurrencies and are seeking to implement greater regulatory oversight, as it remains a currency of choice for shady dealers.
“A recent study by the University of Sydney and University of Technology Sydney found that ‘approximately one-quarter of Bitcoin users and one-half of Bitcoin transactions (approximately $72bn per year) are associated with illegal activity,” Barclays said in their report.
In a rare bit of good news, however, U.K. and France recently stated they will create framework for cryptos.
“France has every interest in becoming the first major financial centre to propose an ad-hoc legislative framework for companies making an Initial Coin Offering,” French finance minister Bruno Le Maire wrote in an op-ed on a website last week.
Pliniussen says buyers and markets are becoming more comfortable with the regulation and adjusting to the greater scrutiny.
“There’s this learning curve that naturally comes with a new asset class like this and that’s what we’re seeing,” he said.
While Bitcoin’s future remains uncertain, Koeppl says the fact that this technology has been created is symbolically very important.
“The concept of having a blockchain where you do not have to have intermediates is quite transformational and goes beyond cryptocurrencies,” he said.