Raynor de Best
Research expert covering finance, insurance & real-estate, internet & e-commerce
Get in touch with us now1) As mentioned above, cryptocurrencies are an online currency based on the blockchain technology. What does blockchain do? The blockchain protocol essentially works like a distributed ledger. Rather than a record existing in a single location, such as a regular computer server, the data is shared by multiple personal computers anywhere in the world. Additionally, the data is not only shared by its users, but can also be edited and checked by them. This means that users can complete transactions without having to go through a central intermediary. As every participant is both an active user as well as a server, the data becomes difficult to shut down or to hack. In theory, blockchain provides a fast and secure way of financial payments. Therefore, expectations in Europe on the effect of blockchain technology on payment solutions are high. Additionally, Spanish bank Santander, together with its partners Oliver Wyman and Anthemis Group, estimated in 2015 that blockchain technology could reduce banks' infrastructure costs by 15 to 20 billion dollars per year. Other sectors in Europe could also profit from blockchain.
2) So currencies like Bitcoin and Ether can be used for daily financial transactions. In 2015, approximately four percent of consumers in France stated that they use cryptocurrencies as a daily payment method. They also have some attributes of traditional currencies. Ethereum, for example, has its own exchange rate. Despite this, cryptocurrencies do not act like like a regular currency. Most currencies have an expectation of inflation built into them, meaning that the same amount of money in a few years time will not have the same purchasing power as it has today. While traditional fiat currencies are expected to decline in value, cryptocurrencies instead are determined by supply and demand. This transforms them into a valid investment asset to buy and to trade with. In 2016 alone, trades of Ethereum on the Ethrade platform reached a total of over 3,000. Numbers peaked in February 2016, when monthly trades amounted to 408.
3) Where does the interest in cryptocurrencies, which don't physically exist like dollar bills, come from? This has multiple reasons, the first of which is the ever-growing value of Bitcoin. In March 2017, the market cap of Bitcoin was valued at approximately 20,64 billion dollars. On 12 October 2017, one Bitcoin was valued to be worth over 5,000 U.S. dollars and by 29 November 2017, as said, this was almost 10,000 U.S. dollars. A second reason is the equally dramatic success of Ethereum, Bitcoin's main competitor. In 2014, this company had a successful ICO of approximately 14 million U.S. dollars worth of Bitcoin, equaling 0,40 U.S. dollars per ether (Ethereum's digital currency). The succes of Ethereum proved so alluring that Goldman Sachs estimated in August 2017 that over one billion dollars had been raised through ICOs that year, overtaking traditional seed and angel funding as the main source of tech funding in 2017. Three years later, this was worth 307 U.S. dollars per ether. Success attracts investors who are looking for profit, as happened for example in the 1630s when tulip bulbs in the Netherlands were considered a great asset for stored value. This market crashed, however, whilst cryptocurrencies just kept increasing, making them more and more interesting for investors.
4) Is everybody enthusiastic then about these developments? Not necessarily. Morgan Stanley indicated in January 2018, for example, that the mining of bitcoin and other cryptocurrencies could require up to 140 terrawatt-hours of electricity in 2018, a size larger than several small-sized European countries. In addition, financial supervisors in Europe struggle with this phenomenon and tend to not yet promote cryptocurrencies as a means for investment. Based on a survey conducted in the Netherlands, for example, currencies are not listed as an investment instrument. Indeed, the total number of European investments in blockchain and its most-known application Bitcoin reached a number of seven in the third quarter of 2014. In the same year, 96 percent of respondents in Great Britain also indicated they neither used nor acquired any cryptocurrencies such as Bitcoin, or other currencies such as Litecoin, Devcoin, Dogecoin or Feathercoin. European central banks recognize the existence and potential of blockchain and cryptocurrencies, but prefer to warn investors of the high risks and volatility involved with investing in this type of asset. Even Goldman Sachs, the bank that pointed at the increased use of ICOs, estimated in 2017 that the aggregate market cap of cryptocurrencies equated to less than two percent of the value of all the mined gold in the world.
