Are cryptocurrencies heading toward mass adoption? They very well could be by becoming a mainstream form of payment within the next 10 years, according to a 2018 report released by two British academics.1)Retrieved 22 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

Digital currencies, which rely on innovative technologies like the blockchain, are the “next step” in money’s evolution, claimed William Knottenbelt, a professor of Applied Quantitative Analysis who teaches at Imperial College London, and Zeynep Gurguc, a research associate in the Innovation and Entrepreneurship Group at Imperial College Business School.2)Retrieved 22 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

These two academics are not alone in their optimism. Several other market observers have offered commentary on how digital currencies are benefiting from growing use. “What we’re witnessing now is crypto finally gaining long-overdue recognition by businesses, state authorities and the financial world — most importantly, by respected traditional banking and fintech institutions,” said Alexander Ivanov, CEO of public blockchain platform Waves.3)Retrieved 23 July 2018 https://www.cnbc.com/2018/05/31/ceos-on-whether-cryptocurrencies-will-be-mainstream-in-2019.html

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Barriers To Adoption

Digital currencies will need to overcome several challenges in order to obtain widespread adoption, market observers have noted. Knottenbelt and Gurguc, for example, identified six specific obstacles that cryptocurrencies must overcome in order to experience broader use.4)Retrieved 23 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

A TechCrunch article written by Neil Haran, a cryptocurrency enthusiast and angel investor, also spoke to variables holding back mainstream adoption, specifically price volatility and its causes.5)Retrieved 23 July 2018 https://techcrunch.com/2017/04/20/whats-keeping-cryptocurrencies-from-mass-adoption/

Here are some of the challenges outlined by these market observers:

Volatility

Price volatility is a major challenge for digital currencies, as it undermines their ability to function effectively as a store of value6)Retrieved 23 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html and as a medium of exchange.7)Retrieved 23 July 2018 http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining

There are some major drivers of cryptocurrencies’ ongoing price volatility, such as their markets being driven largely by speculation, because many investors want to purchase cryptocurrencies and sell them at the highest possible price.8)Retrieved 23 July 2018 https://techcrunch.com/2017/04/20/whats-keeping-cryptocurrencies-from-mass-adoption/

Scalability

The inability that some digital currencies have to scale could easily deter consumers from embracing them. Bitcoin, the first digital currency to scale, is one such example.9)Retrieved 23 July 2018 https://www.coindesk.com/information/can-bitcoin-scale/ This cryptocurrency was designed to process seven transactions per second, a far lower number than other payment methods like Visa, which can handle 24,000 transactions per second. Bitcoin was designed to have 1MB blocks.10)Retrieved 23 July 2018 https://www.coindesk.com/information/can-bitcoin-scale/

To expand the capacity of the bitcoin network, some industry participants advocated increasing block size. While this proposal can seem straightforward enough, key stakeholders disagreed about how large the blocks should be. After several proposed solutions failed to obtain the needed support, the bitcoin network implemented some upgrades, including Segregated Witness11)Retrieved 23 July 2018 https://bitcoinmagazine.com/articles/segregated-witness-activates-bitcoin-what-expect/ and the Lightning Network.12)Retrieved 23 July 2018 http://fortune.com/2018/03/15/bitcoin-lightning-network-technology/ These updates improved the network’s ability to process transactions.

Complexity

Digital currencies have complicated underlying technology, and understanding this technology can require an investment of time and energy. This could diminish cryptocurrency’s chances of enjoying mainstream adoption, because having products that are user-friendly is integral to widespread acceptance.13)Retrieved 23 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

“Blockchain technology in its current form is very difficult to use,” said Shawn Wilkinson, founder and chief strategy officer at storage startup Storj.14)Retrieved 23 July 2018 https://cointelegraph.com/news/blockshow-announces-blockshow-americas-2018-conference-in-las-vegas-august-20-21 He emphasized that in order to use Bitcoin, a person must understand how public and private keys work, and then they must go through several steps in order to both obtain the digital currency and then leverage it in transactions.

Regulation

The regulatory environment surrounding digital currencies is highly complicated, as jurisdictions frequently take differing approaches to supervising cryptocurrencies.15)Retrieved 23 July 2018 https://corpgov.law.harvard.edu/2018/03/26/the-fragmented-regulatory-landscape-for-digital-tokens/ Having such a highly fragmented landscape makes the entire digital currency space seem more uncertain, which is unlikely to give them incentive to get involved.

Bitcoin could have a very difficult time gaining mainstream adoption unless government officials coordinate to create universal regulations.16)Retrieved 23 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

Hard Forks

Hard forks are permanent changes in the protocol of a digital currency—and they provide additional uncertainty. Take Bitcoin, for example, which was designed to have a hard cap on the number of units that can exist at any one time (21 million units). However, through a hard fork, the community could change this and set the hard cap to 42 million, therefore altering a fundamental characteristic of the digital currency.

Another practical consequence of hard forks is that they could potentially split a digital currency’s blockchain in two, creating two rival chains.17)Retrieved 23 July 2018 https://techcrunch.com/2017/04/20/whats-keeping-cryptocurrencies-from-mass-adoption/ This could provide additional uncertainty, as users and investors would need to figure out which chain is best for them.

Incentives

When creating digital currencies and their environments, developers, technologists and entrepreneurs must consider how they will use incentives to impact behaviour, noted Knottenbelt and Gurguc.18)Retrieved 23 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

Bitcoin’s protocol, for example, compensates miners for verifying transactions, making it worth their while to incur the costs of specialised hardware and electricity. Unless these incentives are created in a thoughtful and deliberate manner, it will leave the system open to exploitation by certain users.19)Retrieved 23 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

Summary

Cryptocurrencies could potentially achieve widespread adoption, but achieving this milestone will require them to overcome several key obstacles. By surmounting these challenges, digital currencies could make themselves far more appealing to users and investors while also creating a better situation for everyone interested in the space.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

References   [ + ]

1, 2. Retrieved 22 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html
3. Retrieved 23 July 2018 https://www.cnbc.com/2018/05/31/ceos-on-whether-cryptocurrencies-will-be-mainstream-in-2019.html
4, 6, 13, 16, 18, 19. Retrieved 23 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html
5, 8, 17. Retrieved 23 July 2018 https://techcrunch.com/2017/04/20/whats-keeping-cryptocurrencies-from-mass-adoption/
7. Retrieved 23 July 2018 http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining
9, 10. Retrieved 23 July 2018 https://www.coindesk.com/information/can-bitcoin-scale/
11. Retrieved 23 July 2018 https://bitcoinmagazine.com/articles/segregated-witness-activates-bitcoin-what-expect/
12. Retrieved 23 July 2018 http://fortune.com/2018/03/15/bitcoin-lightning-network-technology/
14. Retrieved 23 July 2018 https://cointelegraph.com/news/blockshow-announces-blockshow-americas-2018-conference-in-las-vegas-august-20-21
15. Retrieved 23 July 2018 https://corpgov.law.harvard.edu/2018/03/26/the-fragmented-regulatory-landscape-for-digital-tokens/