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Will Crypto Ever Rule the World?

Cryptocurrency has been having a good months. Just a few weeks after the price of bitcoin hit a record high, the good folks at CME Group announced on January 26 that it would begin accepting bitcoin futures as payment for contracts. That has many wondering when it will become inevitable that every kind of transaction will occur in Bitcoin. Eventually? Who knows. But it is time for some serious thinking about the future of cryptocurrency, and which currency is destined to rule it.

Coinbase — an American cryptocurrency exchange — recently released an in-depth look at the state of cryptocurrency, including what markets like bitcoin and ethereum will look like in the future. With an astounding $12 billion in assets, Coinbase is the world’s third-largest cryptocurrency exchange, and the largest in the United States. The group worked with Futurity Ltd. to examine what bitcoin futures on the CME and other exchanges will do to markets and how it will affect the type of jobs those markets will be expected to host.

“The sudden surge in investor interest and global interest in cryptocurrency is still largely unpredictable,” the report states. “While markets like bitcoin now host a typical range of applications, and with longer maturity such as bitcoin cash, and newer activities such as ethereum tokens and blockchain tokens, there is not really a defined base of applications.”

Those applications include using cryptocurrency to make purchases at big chains like Walmart or Tesla. Because cryptocurrencies are “futures-based,” those purchasing digital assets with a fiat currency like cash or credit card will have to commit to buying digital currency at the moment Bitcoin futures will become available. They would then need to reconcile that by reconciling the same currency over a given time. That computes into a much faster payment time and increased security, but also leads to a bunch of issues. Here are the four most obvious:

Currency convertibility: Many cryptocurrencies are on hold at Bittrex or OKEx. With futures trading, any trades that are posted will have to be settled in cryptocurrency. That means any funds backed by money provided by other entities in the conventional world would need to be withdrawn. Bittrex, OKEx, and others are currently working on methods to combine cryptocurrency and fiat currencies to make payments and settle transactions, but not one of those solutions works for every currency.

Stale assets: “The rise of a gold standard comes at the cost of systemic risk,” the report says. The practice of government-issued money — gold in this case — doesn’t lose value. As more money is created, the value of the currency stays the same. In comparison, most cryptocurrencies don’t operate in an era when the value of currency is fixed by the central bank.

Underlying fundamental: The mid-2000s saw the growth of so-called Bitcoin. That led to a bunch of worthless assets piling up. Even as Bitcoin and other digital assets expand, when they are trading as options on futures exchanges, it will introduce an additional layer of friction to transactions and essentially end the act of purchasing assets from cash or credit card. Companies like Ethereum have acted as a way to provide assets that are backed by the underlying trust of a fund. But if all digital assets are liquid options, that trust will disappear.

Overall, the report concluded that we should not expect cryptocurrency to completely replace cash anytime soon. Those taking deposits or making withdrawals with a fiat currency will want to know that their deposits or withdrawals are backed by a physical commodity — with blockchain at the center of it. Until then, the volatility in the “hard” virtual-money world is an irritant that presents a reasonable amount of risk. Fortunately, decentralized networks have dramatically reduced that risk.