Cryptocurrencies Are Hitting An Inflection Point, And Bringing Market Maturity With Them

News, Opinion | July 4, 2019 By:

Bitcoin and the cryptocurrency ecosystem have come a long way since the unveiling of Satoshi Nakamoto’s famed white paper “Bitcoin: A Peer-To-Peer Electronic Cash System” in late 2008. Since then, the environment of digital currencies has grown from an obscure fringe concept at the convergence of computer science, game theory, and monetary economics to a robust and rapidly expanding market for a new generation of assets and technology. 

The road to today’s version of the cryptocurrency space has had its ups and downs, littered with scams, misinformation, innovation, and hope for many of the unbanked and poverty-stricken regions of the world. 

Today, we’re at a potential crossroads for catapulting cryptocurrencies into mainstream and institutional acceptance across the world. 

A Transition Towards the Adoption Phase of a New Technology 

Once ridiculed by legacy banking and financial institutions, digital currencies have become the flagship moves of major tech firms like Facebook, and have even pressured the Bank for International Settlements (BIS) into researching the release of its own digital currencies based on baskets of fiat backing. 

The noise surrounding cryptocurrencies is representative of a common theme among emergent technologies. First, they are outright denied, like Bitcoin was as an anonymous currency for black market activities. Next, they attract curiosity outside of hobbyists and further dismissal from the establishment with an emphasis on the underlying technology over the invention itself — colloquially known as the “blockchain, not Bitcoin” phase. 

Finally, breakthroughs in the underlying technology, further maturity of the markets, proper timing, and more awareness by the mainstream produce a revelation that Bitcoin may be here to stay

We are on the cusp of that pivotal point in cryptocurrency development today. More than a decade into an eminent technology, cryptocurrency markets, despite their history of misgivings, seem ready to take the next leap into institutional and regulated adoption — with an emphasis on transparency. 

A financial transformation seems inevitable, and whether you want to contribute that the Facebook’s Libra raising further awareness or Bitcoin’s latest price spike, it’s irrelevant. 

Trending Towards Market Maturity Amid an Evolving Backdrop  

Core proponents of cryptocurrencies have always advocated them as an alternative to the current financial paradigm, not necessarily a replacement. Bitcoin’s existence as a “digital gold” is a viable means of value retention for people in economically destitute areas with high inflation, and those populations still comprise only a small portion of Bitcoin users. 

The vast majority of cryptocurrency users and proponents inhabit developed nations, particularly in North America, Asia, and Europe. And ongoing economic concerns ranging from the U.S. and Chinese trade war, to an inversed U.S. Treasury yield curve, to Facebook’s high-profile blockchain entrance are further supplementing the narrative that we are quickly transcending the notions of 20th-century money

Cryptocurrencies, and Bitcoin, in particular, are looking more appealing than ever. The problem? Much of the market infrastructure is still immature, rife with opaqueness, and places retail investors in the midst of enormous risk. 

As high-profile bids by Bakkt and Fidelity continue to push the narrative forward that digital assets are going to become both institutionalized and more widely available to retail traders, it is important to take note of some of the challenges (and solutions) addressing market maturity. 

For example, information concerning upstart cryptocurrency projects (i.e., altcoins) is often wrong or misleading. Retail investors, who may have only a tenuous grasp of Bitcoin, can be easily fooled into overlooking the inflationary aspects of altcoins controlled by small, and opaque, development teams. Similarly, many smaller exchanges, located in fragmentary locales in Easter Europe or SE Asia, are known for fabricating volumes to rise up the ranks of coin aggregation sites — like CoinMarketCap. 

Fortunately, in what seems like the gearing up for the next major bull run in the markets, large exchange players, and coin aggregation/metrics sites seem poised to create a more mature market. 

CoinMarketCap has recently launched its Data Accountability & Transparency Alliance (DATA), comprised of many exchanges and Crypto Briefing, in a bid to improve transparency across both exchanges and project analysis. Similarly, some exchanges, like Kraken, are working on self-reporting revenue to assure investors on solvency, exchanges are discussing self-regulation, and many (e.g., Binance) are tapping blockchain forensics firms and KYC providers to appease regulators. 

Add in the exponential surge in cryptocurrency derivatives products, from BitMEX to Deribit to meteoric increases in CME Bitcoin futures, and the developing maturity of cryptocurrency markets is evident. 

Facebook’s Libra, Chinese capital flight, rising prices, and better underlying technology all may contribute to the growing demand for increased maturity in crypto markets, but it seems that we have been trending towards an inflection point in adoption for quite some time.

Libra may ultimately prove the spark that grabs the full attention of central banks (i.e., BIS), but if you look at more subtle developments, Bitcoin and crypto have been making strides in adoption elsewhere too. For example, volumes on P2P exchanges like LocalBitcoins and HodlHodl continue to organically grow around the world, and Bitcoin ATM numbers are at an all-time high. 

Regulating P2P exchanges and Bitcoin ATMs bring unique challenges, but some institutions (e.g., the ATM Industry Association) are already advocating the adoption of standardized practices and regulations to protect investors. 

Steppin back, the picture of cryptocurrencies reveals that legitimate demand is there amid an uncertain economic backdrop and increasing user interest in the technology. Adoption is increasing, technology is improving, and steps are being taken towards improving market maturity — ranging from enhanced transparency to institutional product offerings like derivatives. 

The question now becomes: will new regulatory safeguards, institutional products, and innovation usher in the promised era of open finance to the world? Previously, the question was whether or not Bitcoin was legitimate. 

That notion has been discarded, as Bitcoin’s robustness is proven, and with it, Bitcoin has brought an industry that is quickly looking like it is on the cusp of maturing into the next wave of financial institutionalization.