Do cryptocurrencies have a future? | RPP News

In 2023 we face questions about cryptocurrencies that have been unanswered for a long time. Possibly since they were born but, as things were going well, it was not important to answer them. Instead, last year their price suffered from the onslaught of inflation and fell by two giants of crypto-investments: the Terra platform and, at the end of the year, FTX.

Perhaps the most relevant question is: do cryptocurrencies really have a future?

Other important questions would be: is it a model that can be improved? Is it better to wait for central banks to launch their own cryptocurrencies before investing in them? What lessons do investors learn from their performance in the markets?

A short and simple explanation

Cryptocurrencies are virtual currencies or assets. That is, they have no physical backing, nor are they dependent on or backed by any country or institution, but they can be used as a medium of exchange or as an investment.

They are based on blockchain technology or. blockchainwhich is defined as: “A digital, distributed ledger of transactions, with identical copies maintained in multiple computer systems controlled by different entities”.

That the information is distributed across a large number of computer systems controlled by different entities. blinda the blockchain since, with today’s technology, it is virtually impossible to alter the same information in all the computer systems in which it is distributed.

Having made these clarifications, let us now answer our questions.

Do cryptocurrencies have a future?

The guarantee of a traditional currency, for example the euro or the dollar, lies in the credibility offered by the country or institution behind it.

The problem with cryptocurrencies (bitcoin, ethereum, and a long etcetera) is that the only guarantee is the confidence that one has in them. They have no backing other than supply and demand expectations. Behind them there is only a complex computer system, based on technology. blockchain. Nothing else. There is no other guarantee.

For example, if someone loses the access keys to his bank he can go to his office and, providing his documentation, recover it. But if what they lose are the access codes to their bitcoins, they have lost the money: there is no place to go to make a claim.

According to a recent study, 20% of bitcoins are from users who have lost their passwords.

So, as a transaction system can it serve? Yes, as long as the technology blockchain does not break or cease to function properly.

Now, as an investment, one must be fully aware that it is a speculative product, whose value is not backed by any asset, country or institution. In most cryptocurrencies there is nothing behind it, except the value that the market wants to give it. And today that is largely volatile and speculative.

If the price of a cryptocurrency goes up, it is because there is more confidence in that cryptocurrency and the thought that in the future it will be used to a greater extent. So, as a financial product, do cryptocurrencies have a future? Without a backing realIn the same way, people will cease to accept them to the extent that they no longer see their usefulness.

Cryptocurrencies are intended for transactions. peer-to-peerpeer-to-peer operations in which financial institutions are not in the driver’s seat and are difficult to control.

This feature makes them very attractive for transactions where anonymity is desired (whether for criminal acts or other reasons).

A model that could be improved?

To the question of whether cryptocurrencies are an improvable model, the answer is no. They fulfill the functions of a currency (investment, savings, exchange), they have the efficiency of digital and, in addition, they maintain the anonymity of the user, like cash.

Best cryptocurrencies with backing?

Regarding backed cryptocurrencies, the truth is that we already have central bank currencies. What could a cryptocurrency controlled by a central bank be good for?

A cryptocurrency controlled by a central bank would serve the same purpose as traditional currency, which is already controlled by that central bank.

In contrast, official cryptocurrencies would be very useful for economic authorities because of the enormous efficiency and control over transactions. Moreover, if everything went through them, they could put an end to the underground economy.

But the user would totally lose anonymity. The central banks would know what he has spent every cent of his money on. As in the case of the digital yuan being implemented by the Chinese central bank.

And what lessons are left for investors?

When there is nothing of value behind it, in the end it is very possible that the bubble will burst. It already happened with stamps and it will happen with anything that is exaggeratedly overvalued.

We have seen the rise and fall in the price of cryptocurrencies but, sooner or later, they will reach their profitability plateau and find their function within an increasingly complex and digital system.

If you invest in any cryptocurrency today, do so with full knowledge of the facts, knowing that there is nothing behind it but pure speculation and expectations.

This advice also applies to those who are speculatively investing in the metaverse terrains.

Jorge Pelegrín Borondo, Professor of Marketing and Market Research, University of La Rioja