After a brutal bull run in December 2017, all cryptocurrencies have been undergoing a market cool down for the past months. Although the speculative mania caused by speculators wanting to make a quick buck has largely faded, signs of growing adoption are becoming more clear with every day that passes.
Prohibitive fees, lack of a simple user interface and general unawareness have been a major blocker for cryptocurrency adoption as a means of payment. Bitcoin can currently handle about 4-6 transactions per second, which falls very short of Visa’s limit of 24,000 transactions per second. Bitcoin’s scalability issue resulted in average transaction costs of up to $55 at the peak of the 2017 bull run. Furthermore, sometimes these transactions could take several hours until being confirmed by the network. This not only contradicts many of the initial value propositions of cryptocurrencies but also makes them unviable for regular micro-transactions, like purchasing a cup of coffee.
Recent developments may put an end to these problematic scalability issues. Promising technologies like the Bitcoin “Lightning Network” aim to scale Bitcoin to millions of transactions per second by performing transactions “off-chain” instead of on the main Bitcoin blockchain. Furthermore, technologies like Zilliqa aim to solve the scalability problem by introducing a new concept called “Sharding”. In a sharded blockchain, computing power is split into several “Shards” in order to process transactions in parallel. Early tests in Zilliqa are showing transaction throughputs of up to 2,828 transactions per second, which is magnitudes higher than any current blockchain can process.
Solving the blockchain scalability problem will allow cryptocurrencies to compete with major payment processors like Visa (NYSE:V), which is a crucial step in the adoption of this new technology.
One core aspect of a currency is that there needs to be a liquid market that allows for price discovery. Although the liquidity of Bitcoin is still magnitudes lower than traditional forex pairs like EUR/USD which move $575 billion on a daily basis, it has significantly grown over the past years. In the last 3 years, the daily trading volume of Bitcoin has risen from around $20 million to over $4.2 billion today.
The direct benefit of this liquidity increase is that it has made Bitcoin more viable as a currency. This has resulted in the creation of several cryptocurrency oriented freelancing platforms where early adopters complete tasks in exchange for digital currencies. WIRED recently reported that a bounty hunter calling himself “Crypto Shaolin” spends an average of 15 to 20 hours a week completing bounties through the cryptocurrency freelance platform Bounty0x, earning more than $50,000 worth so far this year.
Speculation is a core component of cryptocurrency adoption since it brings the assets into many different hands and helps in discovering their true value. However, in order to ensure long-term growth and adoption, there needs to be a liquid market that enables users to exchange cryptocurrencies for labor or goods.
Hyperinflation has affected the currencies of many emerging markets currencies in 2018. The Venezuelan Bolívar is expected to have suffered an inflation of 1,000,000% by the end of this year, followed by the USD/TRY, which already lost 40% against the US Dollar this year and the Argentinian peso which lost 53% against the same.
Historically, gold and silver are seen as stores of value in times of crisis. Demand for precious metals often jumps during market downturns and in failing economies as citizens purchase them with the aim to protect their capital. However, the big problem with precious metals is that it is hard to store them, cumbersome to use them for day-to-day transactions, and practically impossible to use them for international payments.
Similarly to gold, Bitcoin has a limited supply and has proven over the past years to be an asset largely uncorrelated to events in the economy. It also has many additional features that gold doesn’t, like being very easy to store and the ability to use it for international monetary transactions. This is the reason why many cryptocurrency evangelists see in Bitcoin a better version of gold and sometimes go as far as calling it “Digital Gold”.
If currencies in emerging markets continue to depreciate, affected citizens may soon come across Bitcoin as an alternate store of value and method of exchange.
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