By Tim Courtney, Chief Investment Officer
Amid all the attention generated by artificial intelligence in recent months, we don’t hear as much about cryptocurrency and blockchain anymore. It seems to have been supplanted by AI as the next big thing.
When cryptocurrencies started making headlines years ago, they offered an exciting new frontier of potentially seamless, low-cost transactions with security provided by blockchain technology. However, the early days of any innovative technology are often filled with challenges and growing pains.
Crypto has proven to be no exception, becoming associated with criminal activity1 and extreme price volatility.2 These issues have made cryptocurrencies a risky and largely unused medium for purchases, even though they’re intended to be an efficient means of exchange. When the currencies are exchanged, the transaction is facilitated through “miners” using servers that use more than a small amount of energy.
So instead of serving its intended purpose, cryptocurrency has morphed into a speculative investment — mainly bought by those who can afford to gamble on the possibility it will increase in value,3 rather than used by people who seek a secure and cost effective transaction method.
Like any emerging technology, crypto will likely go through several iterations as it attempts to secure mainstream adoption. But we believe that key issues must be addressed if that is to ever happen. First, the price volatility has to be much lower. Second, the infrastructure and energy needed to facilitate transactions4 — a staggering amount compared to traditional electronic transfers — needs a long-term solution. This is especially true as we get closer to the final number of bitcoins that can be created and the potential reward for “miners” to keep the blockchain crunching computers running becomes much smaller relative to the electric bills that must be paid.
Regulatory developments are also coming5 and will play a key role in shaping the future of cryptocurrencies. We expect to see an increase in oversight to mitigate some of the past problems, including trust issues and price manipulation.6
Right now, cryptocurrency does not look like an attractive asset class to us but rather a speculative one with very limited use. That said, we believe blockchain can still be a viable tool, and time will tell if future generations of cryptocurrency solve the current issues. A more efficient, stable and user-friendly crypto ecosystem may well emerge as the market comes up with solutions that overcome current difficulties.
If so, it will likely look very different, and we could see the market rally around certain cryptocurrencies that are clearly better and more efficient. Similarly for AI, it is likely the first generation will have challenges that will need to be solved with G2 and G3 fixes. If you have any questions, please contact your Exencial advisor.
- Investopedia (2/27/23) — The collapse of FTX: What went wrong with the crypto exchange?
- Forbes (2/23/21) — Explaining crypto’s volatility
- CoinDesk (5/11/23) — In defense of crypto speculation
- Rocky Mountain Institute (1/30/23) — Cryptocurrency’s energy consumption problem
- Atlantic Council (5/31/23) — Cryptocurrency regulation tracker
- Cointelegraph (5/31/23) — Former SEC chief warns influencers about prosecution for crypto price manipulation
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