Cryptocurrency: The future of money?

Last year — and the year before that — Bitcoin outperformed gold. This year, it’s still the largest player in the cryptocurrency universe, but its value has plunged nearly 70 percent, dropping from a December 2017 high of $19,511 to a mid-June 2018 value of $6,238.

Is it a goner? Or is this a short-term plunge?

Only time will tell, but Geoffrey Smith, clinical associate professor of finance, likens digital money to the internet. “People are going to find lots of uses for it,” he says. “I think we are at the very beginning of this.”

It doesn’t grow on trees

What are cryptocurrencies? They’re payment methods that leverage encryption techniques and a computer-based, distributed ledger system called blockchain to regulate the production of tender and validate the transfer of funds. “If you do a transaction on the distributed ledger, it’s recorded all over the world. The record keeping is close to perfect, and it’s also anonymous,” Smith explains.

Another benefit is the currency’s global footprint. “Cryptocurrencies are highly transportable. They can be sent around the world in an instant,” says Ryan Taylor (BS Management ’99), the chief executive officer of Dash, one of the top 20 cryptocurrencies among more than 1,000 players. Crypto-currencies also escape transaction fees and exchange-rate vagaries for those shuffling money between borders.

In addition, cryptos are inflation-proof. “Governments like to create money to fund government programs and activities, and that’s inflationary,” says Smith. Cryptocurrencies are created in a fixed supply, he explains, adding that there are only going to be 21 million Bitcoins. “Once they reach that point, the value of Bitcoin won’t be subject to inflation. That’s a huge advantage over the U.S. dollar.”

Finally, cryptocurrencies are counterfeit-proof. “Not counterfeit-resistant. They are counterfeit-proof,” Taylor says. “You can audit the blockchain and see with 100 percent certainty that you are receiving an authentic Bitcoin. That’s not true with fiat currencies” issued by governments.

So why haven’t cryptos taken off? Why is their value so volatile? “People argue that cryptocurrencies are not backed by anything,” Taylor notes. “So are a lot of the things that we use to facilitate transactions, including fiat money.”

“The value of any currency — even U.S. dollars — is what it can be used to buy,” Smith explains. “The U.S. dollar has value because you can buy everything with it. If the number of uses for cryptocurrency goes up — if Amazon or Walmart start taking it — then it will have more value.”

He adds that the uncertainty surrounding cryptocurrency usage creates more volatility, and the volatility itself makes the currencies’ value less predictable, thereby making them less useful as legal tender. Still, the number of uses for cryptocurrencies is growing. Already, many companies accept them, including Microsoft, Expedia, Tesla, Overstock.com, and Subway sandwich shops.

Cash flows, streams, and dribbles

Taylor says his company is seeing “incredible adoption” in places like Venezuela, where as of October 2016, hyperinflation had knocked the value of the country’s largest bill, the 100-bolivar note, to less than a dime. There, bakers don’t count the bills customers use to buy bread. They weigh them.

Like Smith, Taylor thinks cryptocurrencies are comparable to the early internet — a technology waiting for new business models and uses to come.

In part, this is because cryptocurrencies can be split into very small values. Already, they are getting divided out to eight decimal points. “I don’t think we know yet what the fractions-of-a-penny transactions that cryptocurrencies enable will lead to, but I think there are some exciting things to come.”

Among them, he points to:

  • Publication subscriptions in which you can pay per article instead of per issue.
  • A streaming service now available on Dash that pays musicians the moment a piece is streamed.
  • Cell phone service that grabs the best rates via minute-by-minute carrier switching.
  • Technology to help neighbors buy and sell excess power from rooftop solar generators. Dash is working on this with the U.S. Department of Energy.

Some of these examples reflect money flowing between devices, not just between people. That means cryptocurrencies could be the money that underpins the internet of things.

On the human front, however, the currencies need to become easier to use. Dash is trying to simplify its currency and create a payment mechanism that works as easily as Venmo, the mobile payment service owned by PayPal.

Ultimately, it is features like this that Smith thinks will help whittle down the more than 1,000 currencies into a few big players — much the way credit cards work. He points to speed, anonymity, contract enforcement, and other features now being offered and says those garnering the most popularity will determine which cryptocurrencies will survive. But, survive they will, Smith thinks, and others agree. Cryptocurrencies are definitely a new asset class,” says Taylor. “They’re here to stay.”

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By Betsy Loeff