There is a finite number of bitcoins in the system – 21 million, to be precise – another sharp contrast to the quantitative easing measures adopted by central banks post-financial crisis.
Another hallmark of bitcoins is that they are fully transparent and also fully anonymous. Users can track the movement of bitcoins from person to person without being aware of their identities, which are a randomly generated string of computer code.
Out of the dark web and into the light
Like any other currency, bitcoin is used to purchase ordinary goods and services. Fun fact – the first ever documented transaction using the cryptocurrency was back in 2010 when a user by the name of Laszlo Hanyecz bought two Domino’s pizzas for 10,000 bitcoins.
But it has also provided the perfect cover for online criminal dealings, allowing users to anonymously swap bitcoin for drugs and other illicit paraphernalia as famously happened on the now defunct Silk Road.
On the surface, it is understandable why investors have been so reticent to get involved in the cryptocurrency movement. Bitcoin and its ilk are currently unregulated, nor is there a third party to underwrite your loss in the event a deal goes sour.
As mentioned, there are also thousands of these currencies in existence, which Wyn-Evans believes is “the most disturbing aspect of the story”.
“I suppose they could all be acquired for bitcoins, but more probably they will be worthless. And there is no impediment to issuing these things through what are known as initial coin offerings (ICOs), which lends them a spurious air of respectability.”
However, Alliance Bernstein analysts Gautam Chhugani and Gaurav Jangale argue that the Bitcoin protocol has heralded a shift toward a new decentralised, incentivised economy or Tokenomics.
The new economic order will have an indelible impact on all facets of financial services and corporate life, from entrepreneurs to institutional investors and the incumbent banks.
“Incumbent banks need to smell the coffee,” they write. “Their core clearing ledger function has been decentralised away by the bitcoin protocol. Does it have implications for their custody business? Does it have implications for global remittance business? Can bonds be issued on the blockchain?”
The Alliance Bernstein pair believe that institutional investors will get in on the action, using token assets to invest in early stage protocols of other cryptocurrencies.
“If the clients demand crypto token assets, Wall Street banks will have to respond with crypto token financial products.”
ICOs aren’t going away either, according to the duo, but will eventually exist in a regulated form.
“Though China has banned exchanges and ICOs for now, it could come up with a clear framework for regulating it considering almost 50% of token mining capacity resides in China,” they add. “Outright bans in a decentralised network would simply amount to playing whack-a-mole.”
And with news this week that online marketplace Amazon has registered three cryptocurrency domains (fuelling speculation that it will accept them as payments) and derivatives group CME plans to launch a bitcoin futures contract, should help bitcoin shed its dark web stigma, says David Jinks, ParcelHero’s head of consumer research.
The latter development he finds particularly exciting because it could bring more institutional investors into the space.
“Once bitcoin are traded like any other futures investment, and welcomed by Amazon as easily as pounds and dollars, then they will cease to be the enfant terrible of finance, and instead become a solid investment beyond the reach of national governments’ and banks’ interference,” says Jinks.
