Money

Cryptocurrency Is Here – And It’s Frightening

Most people who buy a house or a car, or buy things on Amazon, never think about “paying” with cryptocurrency. Most people have no idea how many cryptocurrencies there are (over 1,000), though a lot of people have heard something about Bitcoin.

Very few people realize that cryptocurrency is simultaneously a currency, an investment and a technology: you can buy a house with cryptocurrency, speculate with some of your retirement money in cryptocurrency (and eventually invest in cryptocurrency ETFs), and invest in cryptocurrency’s underlying technology (blockchain).

Not surprisingly, banks are smarter than politicians about cryptocurrency, and many individuals and start-ups are smarter than banks. The rise of cryptocurrency is roughly analogous to the rise of medical and recreational marijuana. How long will it take “official institutions” – banks, corporations and the government – to discover cryptocurrency opportunities – and threats? Their discovery journey is already well underway.

What do you need to know about cryptocurrency?

  • Identify theft is essentially impossible with cryptocurrency.
  • It’s potentially nefarious: money laundering, among other transactions, is easy.
  • Governments cannot control it – though they can – and will – regulate and tax it (principally through investment instruments).
  • It’s available and immediate.
  • More and more businesses will accept it – because they will have no choice.
  • It’s volatile: the value of Bitcoin and Ethereum, for example, have swung wildly over the past couple of years.
  • It’s enabled by a technology called blockchain, which according to Portia Crowe offers an alternative to traditional transaction processing“Blockchains are ledgers (like Excel spreadsheets), but they accept inputs from lots of different parties. The ledger can only be changed when there is a consensus among the group. That makes them more secure, and it means there’s no need for a central authority to approve transactions.”

What should you do?

  • Play with cryptocurrency: create your own digital wallet. Convert some conventional money into Bitcoin, Ethereum, Litecoin or Ripple, and experiment with how it works. Consider sites like Coinbase to get started. There are others.
  • Track the investment instruments beyond individually buying/selling cryptocurrencies online. Exchange Traded Funds (ETFs) will arrive soon, after some hiccups with the US SECThere are other investment options including publicly traded funds, hedge funds and private buy-and-hold funds, according to Kevin Gao. They all come with opportunity and risk.  (You should speak to investment professionals before risking meaningful money.)
  • Assess your industry’s appetite for change, experimentation and alternative payment systems; track industry progress as well as the technological infrastructure required to expand the use of cryptocurrency.

Why is cryptocurrency “here” and “frightening”?

It’s here because it provides a safer, faster and cheaper way to transact.  It’s also here because organic growth will stimulate massive institutional interest and offerings.  Even the payment incumbents will come around and proactively champion their cryptocurrency offerings. It’s inevitable because it’s anonymous and secretive.

Which gets us to “frightening.” Any time an established process – in this case, payment systems can be replaced by another better/faster/cheaper one there are repercussions. Amazon’s continued assault on brick-and-mortar retail, Uber/Lyft alternatives to taxis, and Airbnb as replacements for hotels are just a few examples of how disruptive alternatives can be – especially if they’re measurably better/faster/cheaper.

But this disruptive alternative is different:  you can hide.

Why would anyone laundering money, stealing/selling data, or just hiding financial activity of all kinds (for whatever reasons) not use cryptocurrency?

The future of cryptocurrency is well underway.  It will continue to grow both as an investment instrument and a currency.  Everyone should accept its inevitability but be cautious about it use. With a burner phone and some cryptocurrency, there’s not much people can’t do. It’s also frightening because it enables the bifurcation of Internet transaction processing. Some transaction processing — the bulk of today’s transactions — will occur in an open world, while an increasing amount will occur elsewhere. “Elsewhere” in this context means we’ll never know.

The implications of this split are wide and deep. Will Amazon offer cryptocurrency-based anonymity where buyers are sent to another site to execute transactions? Will competitors to Amazon and other online retailers offer anonymity as a differentiator?  Will cryptocurrencies command a large transaction premium? Will investments in cryptocurrency ETFs be made with cryptocurrencies making it impossible to know who is invested in the funds? There are hundreds of these questions. Time will tell how it all shakes out, but cryptocurrency is here to stay.

This article was originally published at Forbes. Image courtesy of Shutterstock.

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