Are Cryptocurrencies the Future?

Since blockchain technology arrived, it has done nothing but revolutionize the internet. The creation of Bitcoin could be one of the biggest financial events in recent years. In this edition of N5 Insights we will analyze the future of cryptocurrencies.

What will happen to crypto? Which are the countries especially interested in them? How will the role of banks change forever?

Increasingly Massive

It is estimated that there are currently just over 100 million cryptocurrency users globally – almost the entire population of Japan in numbers, and 5 times the total population of Chile.

The number of users of these coins has been growing steadily in recent years and everything indicates that it will continue to grow in the future. Just take a look at the following chart:

In 2018 there were barely around 35 million cryptocurrency users globally. As of January 2021, just three years later, this number had already tripled.

Logically, companies are responding to this, creating payment options to facilitate cryptocurrency transactions. One case of this is that of Mercado Libre, which enabled a section on its platform for the purchase of real estate with cryptocurrencies.

Companies like eBay are also beginning to plan payment methods through crypto.

Attractive for Countries with Low Economic

Stability Countries’ fiat money is backed solely by the issuing state. What does this mean? That the lower the trust in this state, the greater the economic instability and the greater the volatility of the currency, then more inhabitants will be those who will place their trust in crypto assets.

In other words, the worse the economy is, the more people will turn to crypto as a means of saving.

As an example of this, let’s see the following graph:

What we can see is that in a country like Nigeria, with economic difficulties and little confidence in traditional investments, it tops the list with the largest use of cryptocurrencies.

In our region we have cases such as Argentina and Venezuela, in which devaluations have become frequent and cryptocurrencies have grown enormously in popularity.

Interest in the Creation of Central Bank Digital Currencies Grows

One of the most obvious cases of cryptocurrency adoption at the national level is that of El Salvador, which has become the first country to decree Bitcoin as a legal currency. However, in most countries another type of interest occurs.

We can see a growing interest from states to issue their own central bank regulated digital currency.

Let’s just look at the following graph that shows the state of state digital currency issuance processes throughout the world:

Since 2017, the interest of states in digital currencies has grown significantly. Today, as you can see, a large number of countries are studying the possibility of issuing their own crypto assets.

In Europe we can also see a change in the discourse of central banks, which went from having a negative opinion about cryptocurrencies to beginning to consider it as a viable option.

Banks Could Change Forever

Opinions have currently been heard about the threats that cryptocurrencies could present to banking. However, the safest thing is that everything depends on the adaptability of banks – as with other digital changes such as Open Banking.

In fact, banks can leverage their influence to become important cryptocurrency advisers to clients, and they can also partner with payment platforms that deal with crypto.

And let’s not forget the most obvious: the possibility of working in the custody of cryptocurrencies. After all, security is one of the biggest concerns for crypto users.

Therefore, more than a threat, we are facing an opportunity. Those banks that know how to adapt and implement new services for users of crypto assets could have an unprecedented advantage in the sector.

Volatility and Energy Consumption: Two Great Challenges

It’s no secret that one of the public’s biggest fears regarding cryptocurrencies is their high volatility. You only need to see the behavior of Bitcoin:

The most important cryptocurrency – which also carries the weight of the entire market on its shoulders – went from having one of its highest valuations in April to plummeting in May.

As expected, the entire crypto asset market accompanied her.

What caused this change? Well, one of the possibilities is that Elon Musk, founder of Tesla, has declined the possibility of buying cars with this currency. This was also followed by the Chinese government, also rejecting the possibility of using this currency.

Another great obstacle to cryptocurrencies, in addition to their high volatility, is their energy consumption. These assets can only exist thanks to the blockchain, a process that requires many validation stays, which implies a high consumption of electricity.

Let’s just take a look at the following graph, which shows the amount of energy that Bitcoin consumes relative to entire countries.

Bitcoin already has a higher energy consumption than that of countries like Norway, Chile or Switzerland. Further down the map we can also see some Big Tech like Google or Facebook, which consume much less energy even despite their enormous influence.

This not only has economic implications, but also public opinion. The world is increasingly moving towards renewable energy, and if cryptocurrencies fail to be sustainable, they may meet a great rejection by the public.

To this is added the great questioning about who will finance that greater energy demand that mining crypto assets implies.

Cryptocurrencies are gaining ground by leaps and bounds. The market has only grown in recent years. These assets are especially popular in countries with low economic stability. Central banks around the world are beginning to consider the idea of ??launching their own crypto assets. The role of banks could radically change if cryptocurrencies become truly massive. Volatility and energy consumption are the two main enemies of the crypto revolution.

Conclusions

As we have seen in this edition of N5 Insights, cryptocurrencies are taking more and more ground, with more people around the world investing in them every year. These are the main points to keep in mind:

• Cryptocurrencies are gaining ground by leaps and bounds. The market has only grown in recent years.
• These assets are especially popular in countries with low economic stability.
• Central banks around the world are beginning to consider the idea of ??launching their own crypto assets.
• The role of banks could radically change if cryptocurrencies become truly massive.
• Volatility and energy consumption are the two main enemies of the crypto revolution.

Editorial: Marcelo Frette