Are cryptocurrencies a missed revolution?

One of the most frequent stereotypes on cryptocurrencies is that they are technically more backward than “real” currencies and therefore their worth in terms of innovativeness does not justify the high prices that continue to exist to this day, even after the sharp downturns of the market.

With this article, we would like to give once and for all an objective insight into this matter.

The first thing we need to do is to verify the accuracy of this stereotype. In other words, we must answer the question:

Are cryptocurrencies really technically underdeveloped? And if they are, to what extent are they, compared to the technologies available today?

To simplify the answer to the question, we will narrow the field to one side of this new technology (which is also the one most used by critics), namely the ability to make currency transactions in a more efficient way.

Today, using fiat currencies, that is, our regular Euros, Dollars, Yuan, we have two ways to move money from one part of the world to another:

– credit cards (and apps for mobile phones that, despite being seemingly new, are all still based on this system)

– banking transactions

Therefore, to compare these systems with cryptocurrencies, we need to consider the following parameters:

– Transaction volumes

– Transaction speed

– Costs

– Anonymity

– Un-breachability

Transaction volumes

Bitcoin is able to process three transactions per second, while ethereum processes five transactions per second.

By way of comparison, Uber processes 12 trips per second and Visa handles 5000 transactions per second (but has the capacity to reach 50,000).

To be remotely competitive, digital blockchain-based currencies would have to increase their capacity by at least a thousand times.

Currently, the only way to solve the issue (as is the case with Stellar and similar systems) is to only move formal encodings of a transfer, without an actual transfer within a blockchain (intuitively speaking, we can imagine it as the difference between a credit card payment – i.e. a simple formal credit – and a wire transfer – i.e. an actual transfer of currency).

This solution would unfortunately deprive the sums transferred of the anonymity and un-breachability they enjoy as long as they remain recorded within the blockchain, therefore cancelling the main advantages of their being cryptocurrencies ( in fact, they would become digital currency, similar to fiat currency).

Transaction speed

For fiat currencies, a distinction must be made between the actual transfer of currency (by wire transfer) and digital payments, which consist of a crediting of currency from one account to another without a proper transfer.

A transfer abroad takes about 3-5 days.

A payment made by credit card instead allows the immediate crediting of the amount spent.

Cryptocurrency transfers take place somewhere between the two cases above, ranging from a few minutes to several hours, depending on the transaction volume, or a few days in extreme cases.

It must also be pointed out that the issue with volumes mentioned previously is also a limit for speed, since faced with a number of users higher than usual, the transaction capacity would simply be zero, so it would no longer make sense to talk about speed.

Costs

A credit card costs an average of 100 Euros per year (depending on the type of card, the cost may be higher or lower than this figure) and involves additional costs for each cash withdrawal and currency exchange, in the event that you make payments abroad in countries with currencies other than the one in which the card is designated.

In online transfers (the least expensive, when it comes to fiat currency), the costs often only apply to transfers abroad.

For example, a million dollars transferred abroad costs about USD 70 and may involve a potential loss due to the exchange rate of between 1% and 3% of the amount transferred (the same loss, of course, must also be calculated for payments made by credit card).

So, in the example of our million dollars, the exchange rate could cost between USD 10,000 and 30,000.

Compared to digital wire transfers, bitcoin is more competitive, given that it allows the same transaction (i.e. a transaction of similar value) with infinitely lower costs.

However, the usual concerns remain that the capacity to process high volumes and so on is extremely limited.

Anonymity

Here, of course, the comparison with fiat currencies is clearly in favour of cryptocurrencies.

No fiat currency, especially in digital form, ensures the anonymity in terms of transactions and availability.

It must be said, however, that as long as we are forced to check out at the shop counter our to pay a mortgage with fiat currency, the need to change our cryptocurrencies into fiat currency will disrupt the magic circle of anonymity and force us to expose some of our savings.

Currently, a type of cryptocurrency generically called “stablecoin” are being studied, that would ensure a fixed exchange rate with a fiat currency (generally, the U.S. dollar) and that could one day be used in place of the digital fiat currency.

Their effective use will imply the development not only of  stablecoin and the tools needed to manage them, but also of an economic system parallel to the current one.

We therefore speak of a deeper change than just a simple technological innovation.

Un-breachability

The point here is very similar to the one just made.

No fiat currency is unbreachable. So our Euros, Dollars, Yuan etc. can be seized and we can be prevented from using or accessing them in many ways. Not to mention the fact that any employee of our banks can transmit all information about our money to third parties.

Also in this case, however, the un-breachability guaranteed by cryptocurrencies is lost when we are forced to pay our lawyer or grocer in fiat currency.

And, as mentioned above, the promised innovation of stablecoin (or any other alternative solution) will never imply only technical issues, but also and above all sociological, economic and anthropological ones.

In other words, it will not be enough to have produced the technical tools to use stablecoin: it will also be necessary for a large number of people to be willing and able to use them in their everyday lives!

After this quick recognition of the actual degree of “backwardness” of cryptos with respect to the fiat currency, the second question, a much more important one, to which we need to answer is:

To what extent does this “backwardness” affect the estimated worth of crypto and, above all, to what extent does it make cryptos a good or bad long-term investment?

The answer to this question must consider two aspects:

– The actual value of cryptos compared to existing technology

– The future value of cryptos compared to existing technology

Actual value

Despite the blockchain’s technological backwardness, the most important cryptocurrencies (especially bitcoin, which is like this sector’s benchmark) are still priced at astronomical levels.

And this despite the crashes suffered over the years.

Since 2011 to date bitcoin has suffered at least 4 devastating crashes.

However, the fascinating side of this phenomenon is that the lows reached during each of these crashes (including the last one in 2018) are increasing among them.

This means that, disregarding these speculative cycles, the value of bitcoin has increased rather than decreased in the long term.

To understand what this means in economic terms, we can compare it with a similar behaviour from Amazon.

Amazon’s prices in May 1997, when it was first quoted on the stock exchange, was USD 1.30.

During the dot.com bubble, its quotation reached up to USD 113, before losing 94% of this amount to just USD 5,97.

The remarkable thing was, however, that in the midst of the crash, Amazon began to gradually appreciate itself, actually increasing its value until today (it’s now more than 90.000% higher than in 1997!).

There is only one reason for this persistent reappraisal, both for bitcoin and Amazon, beyond the market’s speculative cycles.

In both cases, what is “priced” with an apparently outsized reappraisal is not the actual value of the asset, but the long-term innovation potential of the technology underlying it.

This takes us straight to discuss the second point…

Future value

Have we already forgotten what mobile phones were like in the 1990s?

To use the very first mobile phones, you had to spend $2000 (plus $200 in annual service costs) to get a bulky item, difficult to work with and carry and with very limited reception (not to mention the fact that you could only use it to talk to the few other “visionaries” who owned one).

No one at that time would have thought that one day there would be more cells on the planet than human beings!

Yet the adoption of mobile phones has never stopped over time, going hand-in-hand with the technological development of its industry.

The innovation “promised” by cryptocurrencies is just as far-reaching as that of mobile phones and computers, if not more so, because it touches on key aspects of our lives, namely the security and real ownership of our money.

And since history shows that technology rarely goes back, but on the contrary almost always manages to reach its goals and exceed them, it becomes absolutely natural that a bitcoin costs a few thousand times more than a dollar!

As in the case of mobile phones, the adoption of bitcoin and other cryptos is increasing over time and goes along with the development of the underlying technologies.

The promise of an anonymous, secure and property-guaranteed currency is so disruptive to any existing fiat currency that it justifies this price even if we are still at a very early stage of its advancement.

And the continued adoption, growing and unstoppable in spite of all speculative crashes, sustains these prices, which may seem excessive, in the long term.

As with all the other great breakthroughs of the past (and even more so, given the stakes involved in our survival as individuals exposed to now unsustainable pressures by governments and banks) cryptocurrencies follow the same pattern, too.

The potential value in the long term is so much higher that it also has a positive effect on the present value of the most important cryptos, making them practically immune to all speculative cycles that can deceptively devalue them.

For this reason, the only answer that can be given to the issue of cryptos being underdeveloped is always the usual one:

Cryptos are here to stay and they’ll upset our habits.

And their price only accurately reflects this truth.