Ignore the naysayers: cryptocurrencies are more than just a passing fancy, says Chris Skinner.

Unless you have been asleep for the past year, you cannot have failed to catch the buzz around Bitcoin and other cryptocurrencies such as Ethereum’s Ether and Ripple’s XRP. There are even some coins that were created as a joke that are getting significant investments, such as Dogecoin.

Dogecoin was created as a way to educate people about how cryptocurrencies work, and creator Jackson Palmer never expected it to be used as a currency. “When I jokingly tweeted about ‘investing in Dogecoin’ in late 2013, I never imagined that the tongue-in-cheek cryptocurrency I had just brought into the world would still be around in the year 2018, let alone hit a $2bn market cap like it just did,” he said in January. Apparently Asian investors like Dogecoin because they misread it as Dog ecoin, and investment in a dog-friendly cryptocurrency is very popular in some countries.

It is a little like the craze for CryptoKitties that almost broke the Ethereum blockchain late in 2017. CryptoKitties is a game in which users breed and trade digital kittens using Ethereum-based smart contracts, which became so popular that some cats were being traded for $80,000 and the total value of the game reached $12m. All this for a game using cryptocurrencies to create digital cats.

The craze that would not die

What I am describing here is a mad world that few understand but many are investing in. Many predict that this is a bubble and the whole market will come crashing down, and yet for each stumble the market takes it simply comes bouncing back. In fact, there is an excellent website called 99bitcoins.com that started charting the predictions that Bitcoin would disappear back in 2014. So far, it has tracked 236 forecasts of Bitcoin’s death, and yet it still keeps growing.

I find this interesting as I have personally been tracking Bitcoin since 2011, and have heard over and over again from my financially experienced colleagues that it is a scam, will fail, is silly, undermines the system and will never work. Yet it does work. It enables people to trade online for low cost with no financial intermediaries involved. This is the real concern: that Bitcoin and other cryptocurrencies could eradicate the need for financial institutions.

This is why banks keep rallying against cryptocurrencies while embracing the technologies that allow them to operate, namely the blockchain or, more correctly, distributed ledger technology (DLT). Most financial institutions are piloting Ripple, R3, Ethereum and more, because they can see the cost benefits of recording transactions on ledgers where no human involvement is needed. That can save the global markets billions, and is an active area of development.

This brings me to the core point here, which is that we have a technology which could change the world and yet we dismiss the community that created it. DLT is described by The Wall Street Journal as “a foundational technology, like electricity and the internet, whose transformational impact takes much longer”, and I very much agree with this assessment.

For those who have immersed themselves in DLT, we know that it can transform everything from creating digital identity schemes to replace passports to operating digital land registries that replace the land deeds on paper, to allowing clearing and settlement to take place in a far more efficient structure. This last point is illustrated well by the Australian Stock Exchange, which, in December 2017, became the first major bourse to publicly adopt DLT to manage the clearing and settlement of equity transactions. Equally Dubai, which sees itself as the city of the future with plans for flying taxis, robot police officers and autonomous vehicles, made a firm commitment in 2016 to be the first city running on DLT by 2020. The plan is well under way, having signed up IBM to deliver this capability. The objective is to have all visa applications, bill payments and licence renewals, which account for more than 100 million documents a year, to be transacted digitally using blockchain within the next three years. That is impressive.

Two sides of the coin

This is where it gets most interesting, in that you have two extremes. On the one hand, the jokey world of the libertarians, who are playing with digital currencies and having fun; on the other, the serious world of business and government, who are committed to transforming ledgers that need reconciliation and exceptions management to ones that can just run themselves using DLT, based on cryptocurrency blockchains.

The thing is you cannot easily have one without the other. You cannot make Ethereum work without Ether, and you cannot use a Bitcoin blockchain without a Bitcoin. Therefore, claims that Bitcoin is a fraud and cryptocurrencies are a bubble set going to burst are fundamentally inaccurate, when we are talking about a foundational technology that will transform the planet over the next decade. This is why I am holding my investments in cryptocurrencies for now, as I think there will be a lot more action in this space before the bubble bursts, if it ever does.

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.

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