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Promising New Future for Speculative Cryptocurrency

A seminar held by Bitwise CIO answered many of the common questions investors have about crypto. The bottom line? The value remains speculative.

It was akin to a world’s fair of all things cryptocurrency.

A speech by Bitwise CIO Matt Hougan at the recent annual conference of the National Association of Personal Financial Advisors (NAPFA) made the sector sound as if it were from a distant future — a world with decentralized financial systems which involve zero employees, the ability to process loans instantly without a bank, and even nations accepting crypto as a form of legal tender. However, these innovations aren’t events from an alternate universe: they’re the reality for today’s world that has a clear demand for investment decisions to be made at the instantaneous pace of the internet.

Hougan addressed wary investors’ concerns that he’s all too familiar with: doubts over the security of Bitcoin. This is because it's owned by no specific party, and investors fear that the value of the currency will be altered by the generation of new Bitcoin. They also share fears in in investing in such a new and unknown sector at all.

“Crypto is the best performing asset class in the world but this year and last,” he said. Bitcoin has had an annualized return of 230 percent. However, the price of crypto has also crashed repeatedly — Bitcoin has crashed 80 percent or more three different times since 2012.

However, experts say that the volatility of the asset should be expected. One must keep in mind that despite dramatic falls and rises in the price of crypto, the overall price has increased steadily over the years.

As far as the fear that more than the planned 21 million bitcoins will be added into circulation, Hougan reminded the crowd that a majority of those who maintain the Bitcoin network — a scale of over 100,000 computers globally — would have to approve a change in code. That would be highly unlikely, he says, due to the psychology of game theory.

“That would destroy the value of Bitcoin. Because the value would go down, the people who maintain the database are economically incented to have the value of Bitcoin go up and are unlikely to accept that proposal.”

“This game-theoretic benefit or guarantee is what maintains the integrity of the Bitcoin codebase.”

There were two points that Hougan repeatedly mentioned throughout the seminar:

  • “Different crypto assets are like different software companies,” he said, suggesting that what sets each apart is their optimization of different roles. For example, Ethereum, considered by some a Bitcoin competitor, can also be used for decentralized financial transactions.
  • Bitcoin’s value, however, lies in the fact that it’s mostly speculative, similar to gold. The value of Bitcoin is in the security of the currency and the anonymity of each transaction.
    • “It’s like a Swiss safety deposit box,” he said. “It’s the most secure database in the world.”
      Bitcoin’s security is a result of many factors, but its main reason is due to its public blockchain, meaning that every transaction on the network is public, and thus it is difficult to fraud the system.

    “Falling trust in institutions are a big trend that is impacting crypto,” Hougan said. The “rise in Internet communities and the ability to find like-minded people” are factors that continue to contribute to the success of blockchain technology.

    While it’s still up in the air as to which cryptocurrency will be of the most value, the consensus of many is that crypto is here to stay. Through new innovations and changing attitudes, it’s apparent that the world is rethinking the role of commerce in the age of the metaverse.