What is cryptocurrency’s role in the future of money?
Cryptocurrencies are digital currencies that use online ledgers, called blockchains, to record transactions. These blockchains are decentralized, meaning the permanent record is not stored in one location but exists on nodes spread across the system. This design makes the record available to everyone and difficult to modify maliciously (though not impossible).
Proponents of cryptocurrencies praise them for their transparency, portability, and resistance to inflation. Conversely, opponents decry their high volatility, the inefficiency they inject into monetary transactions, and the way their pseudonymous culture facilitates illegal activities. Who’s correct? The answer is likely somewhere between both and neither, located squarely in the middle of its complicated.
It may also be the wrong question. According to tech entrepreneur Elad Gil, important technologies tend to “fade seamlessly into the background.” And it’s in the background that we find a potential future for cryptocurrencies.
An expert’s take
The mania surrounding cryptocurrencies, especially Bitcoin, will remain breathless for some time, but Gil foresees a cooling-off period after which cryptocurrencies will—in the near term at least—emerge as a new digital asset.
Think of it as binary gold. It has few use cases—arguably fewer than actual gold—but it can serve as a store of value that may maintain its worth over a long period. (We’ll have to wait and see.)
Will crypto render fiat currencies obsolete, usher in Web 3.0, and free us from the shackles of centralized government? Probably not.
As Gil points out, Bitcoin and other cryptos are terribly inefficient systems for scaling. For instance, mining Bitcoin is so computationally demanding that the crypto’s electricity consumption is roughly equivalent to that of the Netherlands and more than Chile’s. That’s a country-sized carbon footprint dedicated to the enrichment of a niche group.
For this cost, we receive a transactional system that is terribly slow. Alex de Vries, the founder of the Digiconomist website, estimates that if Bitcoin became a global reserve currency, it would be limited to a paltry five transactions a second. At that rate, Bitcoin couldn’t keep up with the holiday lines at Costco—let alone the needs of the world.
Gil sees other possibilities for blockchain systems, though. Because of their decentralized nature, the records they produce are “trustless.” That means users don’t have to trust third parties to be honest about their transactions. They only have to trust the blockchain system itself.
With the information spread across so many nodes, it becomes harder for third parties to manipulate the ledger or steal other users’ assets. Businesses and individuals may rest easier if their sensitive data are housed on a system with a blockchain foundation.
Are cryptocurrencies relevant for my business?
Given the current hype, Bitcoin and other cryptocurrencies will be something every business needs to research and discuss. As to whether they’ll be relevant, that depends a lot on how things shake out. Will cryptocurrencies become standard digital assets or do they represent a bubble waiting to burst?
That’s a difficult question to answer because cryptocurrencies currently exist on the frontiers of a financial Wild West.
Their values have fluctuated all over the place, propelled by FOMO and investors seeking safe-haven assets to guard against possible inflation. Some governments have also been slow to regulate cryptocurrencies, while other nations have looked into launching their own. Given that cryptocurrencies exist worldwide, a lack of unified international laws will further complicate the picture. And while some companies have adopted cryptocurrencies as a medium of exchange, the trend has hardly been universal.
Whether or not a cryptocurrency will be relevant for your business—in the short or long term—will hinge on how these forces manifest in the coming years.
Is it actionable?
To answer this question, your organization will need to consider which part of the crypto-equation you are interested in: cryptocurrency or the blockchain.
Many businesses are investing in cryptocurrency either directly or by innovating related products. But others are keeping their distance. If you choose to transact or invest in a cryptocurrency, do your homework to determine which is right for you. Many experts—including Secretary of the Treasury Janet Yellen—have warned that cryptocurrencies’ high volatility and lack of efficiency indicate a bubble waiting to pop. Plan carefully.
As for blockchain, it has many applications beyond cryptocurrency, and private blockchain adoption has been proposed for business use. Blockchains could, for example, be used to design secure online voting systems. They could also enable secure sharing of patient health records between hospitals and help track international supply chains. And they present numerous considerations for cybersecurity.
It may turn out that cryptocurrency and blockchain are powerful new technologies, or they may be flash-in-the-pan fads. But at this juncture, it certainly appears that blockchain will have a wider array of use cases for future application.
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- What Skills Will Set You Apart in the Age of Automation?, with David Epstein, author of Range
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- Why Governing AI Is Crucial to Human Survival, with Allan Dafoe, Director of the Centre for the Governance of AI
- Imagine It Forward: Understand the Fundamentals of Changemaking, with Beth Comstock, Former Vice Chair, GE, and Author, Imagine It Forward
- Explore the Future of Blockchain: Three Essential Questions for Evaluating Financial Innovations, with Niall Ferguson, Historian and Author, The Square and the Tower
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