A decade of evolution has served blockchain technologies well, but cryptocurrencies may have reached a turning point in its development path.
Milton Friedman, an American economist who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy, once told an interviewer from the National Taxpayers Union in 1999,
“I think the internet will be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, it’s a reliable e-cash. A method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A. The way in which I can take a 20 dollar bill and hand it over to you and there’s no record of where it came from, and you may get that without knowing who I am. That kind of thing will develop on the Internet.”
Friedman believed that it will be a matter of time before a game-changing form of financial transaction is introduced to the world, where the invention could secularize wealth by returning power to the people. And he has proven his point exactly 10 years later, when the first cryptocurrency - Bitcoin was minted on 3rd January 2009. Over the course of a decade, many cryptocurrencies such as Ethereum, have sprung up and aim to revolutionize the global industries through immutable, transparent and unhackable blockchains. Privacy concern is also another important aspect that attracts people to dealing with cryptocurrencies. Although some cryptocurrencies such as Bitcoin do not have complete anonymity, these issues can be remedied through Bitcoin Mixers (or Bitcoin Tumblers), where users mix their coins with other users, in order to preserve their privacy.
Cryptocurrencies have become the new gold of the digital age since the concept of Bitcoin was materialized in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. The year 2020 could mark the start of the "Golden Age of Cryptocurrencies" because of the growing interest of institutional and retail investors worldwide. Cryptocurrencies have become a new way of investing and accumulating wealth, as well as a means of payment for goods and services.
The “Black Swan” Effect
Market meltdowns, the failure of government and corporate leadership, and the disruption of human civility are built onto the crypto mindset after the 2007-2008 recession. Cryptocurrencies have withstood the test of time and have prevailed as go-to asset classes in the event of global uncertainties, with the likes of gold and silver. Although the cryptocurrency market has not succumbed to obliteration in any of the past scenarios, a relatively small enclave of crypto key opinion leaders (KOLs) from Twitter was weeks ahead of the global COVID-19 pandemic, with crypto's thought-provoking leaders urging people to prepare for the worst. Nic Carter, a partner at Castle Island Venture believed that the pandemic is a "black swan" event that was due to disrupt debt-bloated markets, probably for the better. He further added that uncertainties to the global financial system attracted him to cryptocurrencies such as Bitcoin.
From the media to governments, as well as international health organizations, have all failed to prepare the world for the ongoing COVID-19 pandemic. Now, the call to "decentralize or die" has never taken on a more literal meaning. The longer the pandemic lasts and the more dramatic efforts are made to contain it, the deeper the impact will be on the global economy. Right now, the situation is very uncertain.
However, this skepticism of centralized systems governing the world today has better prepared crypto firms and proponents for what lies ahead. Despite the anxiety rampant on social media, when queried individuals in the crypto sphere are treating the pandemic as a “Life Changes! Be Ready” event.
Morgan Stanley's chief economist Chetan Ahya warned that if the outbreak spreads beyond April and hurts companies more than previously expected, the global economy would enter a recession. In this case, the United States, Europe and Japan would all experience a recession, or two quarters of a contraction in a row, he said.
Interestingly, while close to a billion population worldwide are currently affected by the coronavirus outbreak, online searches surrounding cryptocurrencies are on the rise. According to Google Trends data, Bitcoin-related search queries actually jumped last week. People drawn to crypto don’t believe in central government fiat currencies, and recognize the risks in our institutions and systems. Therefore, as the crisis worsens, speculators are suggesting that bitcoin will become a safe haven for investors amidst the chaos in the global markets.
Transform Weaknesses into Strengths
Osho Jha, an investor, data scientist and tech company executive wrote in a recent article for Coindesk that “The money printer is coming, and when that starts, fixed supply assets such as BTC and gold will do well.” He said that in response to the announcement from the Fed to pump in more than $1 trillion in dramatic ramping up of market intervention amid the ongoing coronavirus meltdown in the United States. Today, U.S. Dollar is the world's reserve currency and more than 61% of all foreign bank reserves are denominated in U.S. dollars, and nearly 40% of the world's debt is in dollars.
With central banks around the globe reducing benchmark rates en masse and moving towards negative interest rates, it might be hard at the moment to think positively about the global economy. Nonetheless, unlike many times in the past where the only way out for the masses was to rely on traditional financial systems, there's an alternative to turn to the cryptocurrency market this time around. The cryptocurrency network serves a global audience and has created peer-to-peer trading tools for the masses, and trading can be made around the clock, all year round. This makes it special, especially at a time when the global economy is facing a potential catastrophe.
As the first de-facto global currency and commodity that people around the world can use as a means of exchange without involving governments, cryptocurrencies continue to meet with interest. For instance, Bitcoin transactions could provide a way to transfer wealth from countries where currency flows are tightly controlled by governments to regions of the world where restrictions are less onerous. For the privacy-conscious users, Bitcoin can also maintain privacy through a process known as mixing, where it is like swapping cash for bills with different serial numbers without the need for a creation of a bank account and other hidden costs.
A recent report by Coinbase also suggests that Bitcoin could be moving closer to digital gold because of the network's underlying properties, which are similar to those of gold, assuming a bullish phase. However, the results also show that XRP was the most gold-related cryptocurrency at the beginning of this year, followed by Bitcoin in second place. Going further into 2020, there could be a relationship between gold and bitcoin observed in 2019, when both digital assets were the "most correlated with gold."
The Privacy Future of Crypto
Bitcoin is due to undergo its third mining-reward halving in May 2020. As the name suggests, the rewards per mined block will be halved to 6.25 BTC from the existing 12.5 BTC. The cycle is replicated every four years, and is expected to combat cryptocurrency inflation. Bitcoin nodes around the world will reject anything that does not meet the rules they expect from the system.
Given the intangible nature of Bitcoin, the cryptocurrency is treated as something that is mined, stored, and whose mathematically proven finite supply ensures that its value rises and surpasses unlimited fiat currencies like the US dollar. The rise of Bitcoin has drawn many cryptocurrency proponents led by libertarians, cypherpunks and anarcho-capitalists who want little to no involvement from governments, who are debating over the regulation of cryptocurrencies when it comes to the future of cryptocurrencies. Government regulations on cryptocurrencies can be a double-edged sword. While regulation ensures that cryptocurrencies transactions are not used for illicit purposes such as theft and abuse, it could not safeguard users' anonymity and transfer the control of one’s assets to individuals. Governmental concerns with privacy coins, cryptocurrency mixers and the use of cryptocurrencies for illicit activities are redundant most of the time.
Data from New York-based blockchain analytics firm Chainalysis and the United Nations Office on Drugs and Crime revealed that traditional fiat money is used 800 times more than bitcoin to launder money on the darknet. The results don’t take into account estimates of money laundering through conventional markets.
In addition, according to a recent Chainalysis webinar, the majority of funds sent to cryptocurrency mixing services or tumblers comes from exchanges, which indicates that such funds are primarily used for privacy purposes rather than for illicit activities. Stolen funds represent only 8.1% of all funds sent to cryptocurrency mixers.
Governments across the globe are looking to challenge decentralized currencies and are increasingly looking at launching their own cryptocurrencies to replace fiat currencies, which if they are successful in implementing them to the world, the very definition of anonymity in cryptocurrency will cease to exist. Some experts claimed that cryptocurrencies just can’t compete with national financial infrastructures. However, Vitalik Buterin, co-founder of Ethereum, believes that with or without blockchain technology, digital currencies will continue toward mainstream adoption and foresees the more appealing future currency to be decentralized and private.
In a recent Block TV podcast on March 4, Vitalik is hopeful for the future of cryptocurrency — specifically the fate of decentralization. He said that:
“We've been seeing many situations where even things that are perfectly legal just end up getting restricted because whoever runs the centralized chokepoints just wants to exclude some category of users and I think those are reasons why people will continue to be interested in fully decentralized digital currency.”
Coronavirus outbreaks, US-China trade wars, middle east tensions and plummeting oil prices are some of the many issues that are plaguing the world government. These challenges are litmus tests for the foreseeable future to determine if the traditional financial systems still work today. On the other hand, a growing interest in cryptocurrency could set off the new era of global financial systems that could finally usher a new era of a privacy-focused decentralised financial system based on the new asset class, accompanied by revolutionary solutions such as coin mixing, where one visits a website (e.g. MyCryptoMixer.com ) to anonymise the transaction without ever needing an account.