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With the recent downturn in the crypto markets, there is much speculation about what will lead to a resurgence of the market. People who believe in hype is more important than fundamental value for this market. For those who think it will be like the opening of the Bakkt exchange and the approval of a bitcoin ETF could really move the needle. This thinking also assumes the value of the market for the foreseeable future. The other school of thought is that of the internet stock market in the early to the late nineties. I will try to lay out some factors I think will drive the growth of the market over the next few years.
problems
1) The general public stills thinks of bitcoins when they think about cryptocurrencies. Bitcoin has decreased confidence by many in the near term value of cryptocurrencies. Because of this, many projects with great promise are being undervalued.
2) Most existing smart contract platforms face significant hurdles to scaling. Many thinks of being a smart contract, but there is still a question of bandwidth and storage. Not only do not have the capacity to scale with these components in mind, they do not have credible solutions to do so. There's also the interoperability issue. Smart contracts are not yet capable of seamlessly interacting with smart contacts on other blockchains.
3) In the EU and US, securities regulatory framework still internalize the logic of Depression-era securities laws. Moreover, in the US, although the United States, the state level laws vary greatly and regulatory arbitrage is not enough for small businesses in the US. The harmonization of these laws as well as the restoring of trust in some of the more credible projects.
4) Legacy financial systems are mostly not designed to interface with the virtual currency world. In short periods of time.
The Way Forward
Bitcoin
If the growth of bitcoin is the catalyst for the accrual of value in the crypto ecosystem, such value will probably be short-lived. Currently, bitcoin's only value is its ubiquity in entering and exiting the crypto markets, and its memetic value. Many think this is enough. The increase in the adoption of bitcoins should lead to increased demand for bitcoins, which will inevitably lead to an increase in the value of the currency. There are some potential problems with this view. Mere demand is typically not enough to drive the price of an asset if the velocity of the asset is high. There is often an incentive to decrease the velocity of the asset. In other words, people have to hold the assets because they think it is worth holding in the future (like the maturation of a technology that will revenue stream)). In the case of bitcoin, there are no dividends, and the only value would be a change in the number of consumers that use the product. Moreover, unlike ethereum, there is no potential move to a proof of the system (such as a system would allow ether holders to lock up their assets to receive passive income). Finally, bitcoin has no unique properties that would be particularly useful for commerce. With the appropriate infrastructure in place, it is stable.
The best argument for bitcoin is the current network. While this is possible, it's still an argument worth being weary. Gold has been seen as a safe way of storing value for millennia. Bitcoin, on the other hand, is a decade old concept that has seen a shocking amount of volatility. I know so much of the top technical analysts on its street. Jeff deGraaf, the head of technical research at the Renaissance technologies pointed out that no asset with the parabolic movement of bitcoins over the past 12-18 months has ever regained public trust. I know if you are a regulatory breakthrough like an ETF, assuming crypto market appreciation because of perpetual speculative value on a 10-year-old technology is likely not wise.
Limitations of the Smart Contract Ecosystem
Scaling and interoperability are huge issues for many projects in the space. While many projects are promising to be problematic, it is simply not clear who will be able to do so in a meaningful way. Vitalik Buterin of Ethereum has made many promises, none have materialized. Projects like Cardano have formal proofs that validate their approach to proof of the stake, and other features should allow them to scale. However, Cardano's test will not be up until 2019 (and it will not be clear when the main net will be up). A large number of these projects will only be able to generate significant revenues in an economy where many transactions are carried out on the blockchain, solving this problem in a meaningful way that will be a catalyst for the appreciation of worthwhile assets.
Regulations and Security Tokens
Another potential catalyst for crypto-asset appreciation is the growth of a significant security token ecosystem, and the regulatory harmonization likely to accompany it. Currently, the laws between the EU, the United States and other jurisdictions present some serious barriers for companies. The capacity to bring significant liquidity to illiquid assets like real estate will bring a lot of capital into the ecosystem. Smart contractor capable of scaling, or projects that become an important part of the security token infrastructure, should gain a lot of value when the technical and legal framework for these tokens become robust. Projects like Harbor (CEO is the former General Counsel of Blackwater), Securitize and Polymath will probably be winners in this space.
Infrastructure of Legacy Banking Systems
This is likely going to be the last bottleneck. Lobbying can change laws and developers can scale systems. However, banks are inherently conservative in updating technology. Moreover, the SWIFT system is integrated into the entire global financial ecosystem. KYC / AML policies (KYC / AML policies), and most banks being able to accept a wide range of currencies and immediately changing them to some sort of fiat currency (at least initially). Building out this infrastructure should take time. Smart contract platforms like Cardano, understanding the importance of solving this problem Ripple is famously trying to replace the SWIFT system with their technology.
Because it is often easier to build new systems than new systems, the first crypto banking services will probably be provided through banking startups. There are already many interesting smaller banking startups trying to solve this problem. I am only mentioning the kinds of problems that need to be solved.
Fotonbank is a young company attempting to take advantage of the growing demand for crypto banking. The project is promising a few key features:
1) Being able to issue virtual cards with multicurrency wallets;
2) An exchange where cryptocurrency and fiat money can be changed instantly;
3) A variety of business services combining work systems for users Fintech partners and data centers to store payment history;
4) Its own blockchain for financial transactions, data storage, clearing and business;
5) Customizable stable coins (not necessarily tied to the dollar).
These features will be critical in the first stage of the growth of crypto banking. Many projects have solved one or two of these problems. Projects like Basis and Gemini are trying to solve the stable coin problem. BTC limit on how much can be withdrawn per day. Projects like TenX have issued cryptocurrency cards in the EU. And while a project like, it is very useful, the regulatory environment for companies promising to build decentralized exchanges is not clear. After all, the SEC recently fined the creator of decentralized exchange etherdelta.
Multilevel integration is the name of the game for banking. As mentioned above, many projects are attempted to solve problems that need to be solved for the ecosystem to grow. However, there are very few attempting integration in a meaningful way. Projects like ZeosX promise to bring similar projects to market, but they have not even been released to white paper. Fotonbank is an eye to the eye because of the few projects attempting to integrate many elements of traditional banking with the crypto ecosystem.
Takeaway
Buy low sell high
Do not live or die by bitcoin
Speculative value could increase in the near future, many pieces need to be in place for these projects to generate fundamental value. These includes:
a) maturity of the technology for scaling and interoperability
b) regulatory harmonization to decrease barriers for the securitization of assets that normally would not be, and
c) new banks will likely lay out the infrastructure that legacy banks will follow.
Keep these in mind, invest in projects and think about 10 years and HODL.
