Will Crypto-Currencies be the medium of exchange in the future?

To what extent will crypto-currencies be the medium of exchange in the future?

Here, I aim to address what cryptocurrencies are whether they will become the main medium of exchange by discussing their advantages and disadvantages whilst hazarding a guess at which one will hold the crown. My thesis is that cryptocurrencies will be ever-present in our futures but will not be the main medium of exchange.

Cryptocurrencies were introduced in 2008 and they are based on a technology called blockchain. Unlike fiat currencies, cryptocurrencies only fulfil two of Aristotle’s currency criteria: portability and divisibility. So Cryptocurrencies are more like the bartering of a stock than the exchange of money. Nevertheless, this doesn’t stop them from being valuable and something which can be traded globally in replacement of money.

There are a lot of advantages of cryptocurrencies over fiat currencies. One of these is the potential in LICs (low-income countries) owing to the ease of setting up a crypto-wallet relative to a conventional bank account. As of 2016, it was estimated that 39% (this is a reputable static and is widely used) of the world’s adult population didn’t have bank accounts. This will therefore mean that hundreds of millions of people will be given an easy option to trade and save online without the need for physical cash which can easily be lost, stolen and forged. Furthermore, in many LICs inflation is rife — holding one’s money in a separate currency can mitigate this problem. For example, in Zimbabwe in November of 2008, inflation was 79.6 billion%. This statistic is from a paper released by two professors at Johns Hopkins University so it will be a well researched and honest figure. So one of the pros of crypto currencies over money is that they can facilitate the growth of countries such as Zimbabwe, something money can’t do.

Another advantage of cryptocurrencies is that they can be used globally. Unlike fiat currencies, there are no problems regarding exchange rates, you can simply just pay with one currency in America or China or any other place in the universe where there is a square. This is not something which has potential to make cryptocurrencies become the main medium of exchange of the future but it is something which will help.

In addition, cryptocurrencies can’t be forged, unlike money. Although this seems like a fairly small point, it really isn’t. Forgery is one of the biggest problems for fiat currencies. A good example of this is $147 million in fake U.S. currency is in circulation. Cryptocurrencies curtail opportunities to commit crime and create minor (very very minor) inflation through forgery.

The final advantage is you own it. It is indisputably yours and no one can take it away from you. With online money exchange services such as Revolut, Circle and Paypal they can just freeze your account (admittedly it is usually with reason, but the power is there) This is also true of banks and other money platforms. Now, legally you should be able to get your money back but this may take time and you need money to get by in life so this would lead to you having to ask friends and family for a loan in cash whilst you solve your problems. This scares consumers greatly and so if an option is available to hold your money where no one can ‘freeze it’, people will take it. A recent study showed that in the US only 73% (YouGov is a leading polling company and thus this is the closest we can get to the correct percentage) of people actually trust the banks. This is a serious reason why people may start to use cryptocurrencies instead of money as the main medium of exchange.

However, there are many negatives of cryptocurrencies. One of these is volatility. This is something which would mean that they would never really be viable as the main medium of exchange as from one day to the next, people may lose up to or more than 20% of their money in a day. This is too great a risk for people to take and is ,therefore, something which may mean cryptocurrencies will struggle to become the main medium of exchange in the future. (However, this volatility may decrease as cryptocurrencies become more widely used)

Another problem is the flip-side of one of the positives: ‘you own them’ and no one can change this. This means that if you lose your password to your account, then you lose your entire crypto-wealth. This is a huge risk to take. It also means that if someone finds your password, you can be robbed of all you have and it would be impossible to get it back. An example of this is the guy who had all his bitcoin on a hard drive which he then threw away. Having thrown it away he then realised he had lost and couldn’t recover his 7,500 bitcoins. The article says this is about $108 million dollars but of course, this is now an entirely different number just a couple of months on (it is now $83 million). This is a real problem of cryptocurrencies as people will struggle to trust something which could be their downfall.

In addition to this, cryptocurrencies use an extremely unhealthy amount of energy. Bitcoin currently uses around 3.4GW annually (this is just an estimation which is commonly used as it is almost impossible to figure out the exact number due to the global scale of bitcoin) which is more than countries such as Ireland, Serbia or Bahrain. Furthermore, by 2020 it is thought that bitcoin could use more power than the entire world. This is predominately to do with the power required to mine the bitcoin. Worse still is that this is just one cryptocurrency of more than 900. So, this is likely to limit cryptocurrencies potential and governments may make them illegal as the conversation of fossil fuels to energy to sustain this will put great strain on the economy.

Another issue with cryptocurrencies is that they are not managed by a central bank. This is a problem because it means that inflation nor interest can not be managed by a central bank. This is a problem as if these aren’t managed costs of living or the value of each coin may get out of hand and thus this would mean cryptocurrencies aren’t sustainable.

Finally, another significant limitation of many cryptocurrencies is the speed of transactions. For instance, the two biggest currencies in the world by market cap (Bitcoin and Ethereum) can only process 7 transactions per second and 15 transactions per second respectively. This wouldn’t come close to covering transactions on Amazon alone (which reached up to 600 transactions per second in 2017). Having said this, there are some currencies like Ripple which can do up to 1500 transactions per second but this has never been tested so it is hard to prove and this still doesn’t compete with the number of transactions Visa and MasterCard are doing, let alone the daily cash transactions. It is worth noting these figures about transaction speeds are very accurate as they are produced by the systems themselves. So, this is just one example of cryptocurrencies structural weaknesses, of which there are many. Anyone of these or all of these combined could be the reason for cryptocurrencies not becoming the medium of exchange of the future.

The next and important question is which currency will lead the way and become the biggest? This is a question which is almost impossible to answer and if there was a definitive answer, it would be worth billions. Thus, the best people can do is speculate and guess. The two cryptocurrencies earmarked by the press as favourites are Ethereum and Ripple (not the biggest, Bitcoin).

The reason why Ethereum has potential is because it is very difficult to ‘hack’ and it is said in the press to have an ‘exceedingly high immune system’. This is partially because the algorithm used to mine Ethereum is called ‘proof of work’ and it is extremely good at avoiding hacker attacks. The software also has something called ‘smart contracts’ which means it can be used for fund-raising and purchases of things such as houses, safely.

Ripple also boasts some important abilities. One of these is that transactions are extremely quick. Transactions take around four seconds compared to the couple of minutes of Ethereum and hours of Bitcoin. Ripple, in the eyes of many, has the easiest system to use. This sounds minor but actually makes a serious difference. Finally, the two biggest advantages of Ripple are that it has a five-year track record of stable technology and is maintained by a team of world-class engineers. It also, unlike many other currencies and very importantly, uses negligible energy consumption. Ripple is also used by banks such as UBS and Santander. This therefore suggests it is good quality software. However, it is worth noting Ripple is not quite yet where bitcoin is and it doesn’t lend itself as well to being used as a bank account where people can save money etc. It is thought this will change though as the company behind Ripple is constantly changing and innovating the currency.

Bitcoin on the other hand seems to have a fairly troubling future ahead, despite being the biggest cryptocurrency at the moment. This is due to a few reasons: it can’t process more than seven transactions per second, it uses gargantuan amounts of energy and its system isn’t as powerful as many other cryptocurrencies.

This is just speculation, as said previously, and there are only three currencies mentioned above of more than 900. One of these unmentioned ones may be the future of cryptocurrencies (if of course there is one).

So, to what extent will crypto-currencies be the medium of exchange in the future? I think they will play a big role in the future. They will become used all around the world for all sorts of different things. I don’t think they will become the main medium of exchange as fiat currencies are arguably safer and more reliable and this in the end is essentially what people want in a currency (providing you can use it wherever you need it). I think cryptocurrencies will be used in a similar way to PayPal in the future and that when people go to buy clothes or some other good or services online, there will be a button saying would you like to pay with: Visa, MasterCard or Cryptocurrencies. However, in order for Cryptocurrencies to get this far, they must solve a few fundamental problems. Energy usage, volatility and their infrastructure must improve to allow this to happen seamlessly.

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