At Addition Financial, many of our members have been asking us what we think about the future of cryptocurrency. To explain where we think it’s headed, we think it’s important to look at the history of cryptocurrency. So, here’s where it started – and six predictions for the future of crypto.
When Was Cryptocurrency First Invented?
Cryptocurrency seems like such a modern idea that people are often surprised to learn that the idea for crypto dates all the way back to 1982. A mathematician named David Chaum hypothesized the idea of a decentralized currency that would be verified by “mutually suspicious parties.”
Chaum is often referred to as the Godfather of Cryptocurrency because his dissertation included most elements of what we now call a blockchain. He proposed a way to track transactions of digital currency with a digital signature – an idea that evolved into the hash that miners must solve to add a block to a blockchain.
Despite Chaum’s essential role in the history of cryptocurrency, he did not launch the world’s first cryptocurrency. Several other computer scientists, including Stuart Haber, W. Scott Stornetta and Dave Bayer, refined Chaum’s ideas
In 2008, a whitepaper most commonly referred to as the Bitcoin Whitepaper was published by an anonymous person or group going by the pseudonym Satoshi Nakamoto. In the paper, Nakamoto laid out how the modern version of a blockchain would work.
In January of 2009, the very first Bitcoin was minted when the first block, known as the Genesis Block, was mined. Bitcoin is a decentralized currency, meaning that it isn’t backed by or governed by any central bank or authority. That differentiates it from fiat currencies like the U.S. dollar, which is backed by the United States government.
Another way of thinking about any decentralized currency is that it has value because people want it – or said another way, because they believe it has value. The very first Bitcoins mined were worth practically nothing. It took over two years for Bitcoin to achieve parity with the dollar.
How Has Cryptocurrency Evolved Since Its Inception?
Since the inception of Bitcoin, the world’s first cryptocurrency, thousands of other versions of virtual currency have been launched. Some have succeeded and some have failed.
Some of the other cryptocurrency coins that have been in the news include:
- Ethereum
- Litecoin
- Bitcoin Cash
- Tether
- Solana
- USD Coin
While the original idea of cryptocurrency was a decentralized currency that wouldn’t be tied to any standard, some currencies have been created as stablecoins, meaning that they are tied to a standard. For example, USD Coin is a stablecoin tied to the US dollar. That might seem counterintuitive but it’s an example of where things might be headed.
One of the hallmarks of cryptocurrency is its extreme volatility, stablecoins excepted. Bitcoin is a perfect example. In a 21-month period starting in March of 2017 and ending in December of 2018, Bitcoin’s price more than doubled from $1,290 to $3,300. On the surface, that might make Bitcoin seem like a fantastic investment. But it’s important to look beneath the surface.
The truth is that in that same period, Bitcoin’s price was as high as $19,783.06. It reached that height in December of 2017 and by February of 2018, it had plummeted to $6,200. What these numbers illustrate is that the value of any cryptocurrency that’s truly decentralized is impossible to predict. Somebody who bought Bitcoin at a high price and needed to sell or use it after it plummeted would have lost a lot of money.
The use of cryptocurrency has grown significantly as has the public’s interest in it. In September of 2021, the country of El Salvador made Bitcoin legal tender. The decision was widely criticized by economists, who worried that the choice would undermine the nation’s economic stability – and their predictions appear to be coming to fruition. The Central African Republic followed suit in April of 2022.
Some companies have started accepting Bitcoin as payment, including Microsoft, Starbucks, Amazon and Overstock.
6 Predictions About the Future of Cryptocurrency
Now, let’s review some predictions for the future of cryptocurrency. These predictions may or may not come true, but we think it’s useful to look ahead based on what has happened. What does cryptocurrency’s past tell us about its future?
#1: Cryptocurrency Regulation
Our first prediction is that there is a high likelihood that the U.S. government will move to put regulations in place to protect consumers against the risks associated with trading and owning cryptocurrency.
There are several concerns that legislators have expressed. The most obvious concern is that there is a high prevalence of scams in the world of crypto and consumers are losing money to them.
Other concerns include tax evasion and the extreme volatility of decentralized currencies like Bitcoin. Both Congress and the Securities & Exchange Commission (SEC) have spoken publicly about their reservations and it’s probable that there will be some attempt to regulate cryptocurrency in the near future.
#2: More Institutions Will Embrace Cryptocurrency
We’ve already mentioned that some companies have begun to accept Bitcoin as payment. While Elon Musk has famously waffled on the idea of Tesla accepting Bitcoin, the company owned $2 billion of Bitcoin as of February 2022 and it’s probable that accepting it as payment is only a matter of time.
We anticipate that more companies will begin to accept Bitcoin. Payment platforms such as PayPal and Venmo, and investment apps like Robinhood, are already making it possible for users to buy, sell and make financial transactions with Bitcoin.
Financial institutions are also taking a hard look at cryptocurrency and deciding how to handle it. It’s likely that credit unions and banks will come up with solutions to help account holders store and use digital currencies, as well.
#3: Bitcoin’s Value Will Reach $100,000
The general outlook on Bitcoin is positive, although its short-term volatility still makes it a risky investment. We’re writing this in April of 2022 and Bitcoin’s value is over $40,000, down from a high of more than $60,000 in 2021, which was a wild year by any standard.
Many experts agree with us that the overall trend is up and that it is highly likely that Bitcoin’s value will, at some point, top $100,000. We can’t say when that will happen. Any Addition Financial member who buys Bitcoin should do so with full knowledge of its volatility and only with the understanding that looking at the price daily may be stressful.
#4: More Stablecoins Will Enter the Picture
We’ve already noted that decentralized currencies are the Wild West in terms of trying to predict their value. Bitcoin continues to grow (at least, when looked at in the long term) but the results for other digital coins are less encouraging.
What we do think will happen is that more stablecoins will be introduced to the picture. The benefit of stablecoins is that they have a consistent and predictable value. They offer the same security as any other digital asset but without the volatility that makes cryptocurrency a risky investment.
#5: Hackers Will Focus on Cryptocurrencies
One of the hallmarks of blockchain technology is that it is designed to be difficult and expensive to hack. The enormous amount of power required to mine a single block on the blockchain means that for most participants, it is more profitable to operate in good faith than it is to attempt a hack. That’s the benefit of David Chaum’s “mutually suspicious parties.”
The sad fact is that you can always count on hackers to find a way around any security eventually. In 2021, criminals used cryptocurrency to facilitate a whopping $350 million of ransomware payments. That’s a trend that’s likely to continue thanks to the anonymity of digital currency transactions.
We also anticipate that the increasing focus on the environmental footprint of cryptocurrency mining will lead to more efficient methods – and that will, in turn, create new opportunities for criminals to take over blockchains to their own advantage.
#6: Environmental Concerns Will Prompt Innovation
Our final prediction is that ongoing concerns about the environmental footprint of crypto mining will prompt innovation as people try to minimize the impact on the planet. It requires an enormous amount of electricity – 2,188.59 kilowatt hours, to be exact – to mine a single block on the Bitcoin blockchain. Crypto mining also generates an enormous amount of electronic waste as miners discard outdated equipment.
Some digital currencies, including Cardano, Solarcoin, Bitgreen and Nano, are designed to be more environmentally friendly. We anticipate that trend will continue since many of the same people who are interested in buying cryptocurrency are also concerned about the health of the planet.
The history of cryptocurrency has had a lot of highs and lows and we anticipate that the future will, too. The 6 predictions we’ve made here will, we hope, help our members make informed decisions about how and when to invest in digital currencies.
Do you need help managing your crypto investments? Click here to learn about the MEMBERS Financial Services Program.
Posted on May 8, 2022
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