Will cryptos finally have real-life use? - June 19, 2019

Will cryptos finally have real-life use?

More than a dozen of the world’s biggest banks are planning to launch digital versions of major currencies just next year. After more than a decade of volatile Bitcoin rallies and crashes, digital currencies may finally have a real-life use. The underlying technology can bring great changes to financial markets.

After years of studying and investigating, 13 of the world’s biggest banks are launching digital versions of the most important currencies (US dollar, yen, euro and sterling) next year, according to a Financial Times article. What convinced them about utilizing cryptocurrencies is that their use could make “trading less risky and cheaper”. What’s more, Wall Street Journal broke the news of Facebook’s crypto plans that already has the support of some major players on the market, like Visa, Mastercard, PayPal and Uber.

Technology behind cryptocurrencies

The technology used in cryptocurrencies is called blockchain. Simply put, a blockchain is a string of data that is shared between a global network of computers. A blockchain contains many things: the number of currency existing, personal account balances, detailed trade information. It’s also heavily encrypted and since it’s shared between hundreds or thousands of computers, it’s basically impossible to tamper with or crack with today’s technology.

In real life use, this means exactly two things Financial Times mentioned: cheap and safe. Due to the wide network of computers, the price of one transaction becomes minuscule and a lot faster than with traditional systems (like giro). Safety of transactions is also guaranteed by the strong encryption.

What was wrong with Bitcoin?

You may ask that if cryptocurrencies are so good, what was the problem with Bitcoin and others. One word: volatility. With cryptos it’s impossible to diversify, since all other currencies are basically tied to Bitcoin. (See: Bitcoin’s crash makes the whole crypto market tumble.) Bitcoin’s price fell from $20 thousand to around $5 thousand. And there was no real economic reason behind it at all: it was all speculation.

Many people lost a fortune, some even got mortgages to enjoy the Bitcoin ride. But it crashed hard, and although recovered a bit, it’s still weak. Cryptocurrencies aren’t regulated either, so when someone gets robbed or loses a fortune due to bad decisions, they can’t do anything else than stomach losses. And although blockchain itself is super secure, users were making mistakes. There were millions (if not billions) of dollars stolen from crypto exchanges, because those were not secure enough.

All this may change now

The support of the biggest banks may bring an era to cryptocurrencies (and blockchain) when these serious problems are cured. We will have to see how these financial institutions are handling the blockchain, but if they use it as an interbank system, transfers will become faster, cheaper, and more secure. These digital currencies will be backed by their real-life counterparts, which makes volatility smaller, or at least on par with “real money”.

Facebook’s solution, Libra, will be fully digital and could be used in peer-to-peer payments on Facebook, Instagram, and Whatsapp, and basically on any other platform that supports it. Facebook plans to launch it with 1 billion units next year.

According to FT, banks will still have to figure out some legal issues and regulations with their solution, but these could protect users much better than the unregulated markets of traditional cryptos.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.