“Who thinks this is the most stupid, ridiculous thing they’ve ever heard of and it’s going to go down in flames?” asked Staci Warden, Milken Institute’s Executive Director for Global Market Development, to open a session exploring the maturation of the cryptocurrency market at this week’s Milken Middle East & Africa Summit in Abu Dhabi. From my vantage point, just one hand shot up. To be certain, the same session just a year ago would have drawn a much more skeptical audience.
We have observed this market advance by leaps and bounds in the past year. Institutions are investing in cryptocurrencies, bitcoin futures can now be settled for physical delivery, and central bankers are contemplating launching their own forms of digital currency. A panel of experts from various sides of the market shared their perspectives on these developments. These are the top three signs this market is finally growing up:
- Crypto is becoming a hedge in a macro portfolio. After the bust that sent bitcoin tumbling to the tune of 88 percent, critics compared the digital tokens to the tulip bulbs of 17th-century Holland, which prompted a speculative rush that quickly evaporated, leaving behind nothing but pretty flowers and wrecked bank accounts. On the other hand, Mike Novogratz, Founder and CEO of Galaxy Digital, observes today that the market is no longer even questioning whether crypto is real or not. Rather, we’ve witnessed institutions like Fidelity and NYSE move to custody this asset, and advanced “plumbing” laid down to connect it to traditional RIAs. As a result, people feel safer adding crypto to their portfolios as a macro hedge. While more volatile than gold, digital assets like Bitcoin may present more upside potential as adoption is just getting started, but is clearly gathering momentum.
- Its underlying technology is being widely adopted. Blockchain, the digital ledger that makes cryptocurrency possible, is continuing to deliver application across sectors. George Kikvadze, Executive Vice President at The Bitfury Group, touched on the foundational role of trust here: "Blockchain can be the technology to build trust in the system. Trust comes from one simple thing, transparency." Through the transparency offered through blockchain application, we can take data and monetize it. In the near future, Kikvadze believes we'll see more blockchain-enabled business with Facebook and Amazon. In the same vein of building trust, Navin Gupta, Managing Director, South Asia & MENA at Ripple, commented, "To gather trust, you need to work with the system—regulators, participants in the system. Enterprise-ready blockchain needs to be useful, and this network is growing."
- Crime-fighting is more sophisticated. Edelman’s own recent study of millennials and their views on cryptocurrency found that, even among its users, 60 percent believe the digital asset makes it easier to hide criminal activity. However, the transparency of cryptocurrency has led to a wave of innovation in digital crime-fighting. Mike Gronager, co-founder and CEO of Chainalysis, which helps government agencies and financial institutions investigate crimes on the blockchain, noted that “we can see the history of crypto, meaning law enforcement can solve a lot of cases.” In October, the U.S. Department of Justice took down the massive dark-web child-abuse website, Welcome to Video, leading to the rescue of at least 23 children being abused. The takedown, which Chainalysis helped bring to fruition, is notable also because the investigation relied not on offensive hacking efforts or surveilling encrypted communications, but on tracing the bitcoin transactions of the site’s participants.
At Edelman, we see the overarching goal of innovations like cryptocurrency to be greater financial inclusion and transparency in capital markets. I’m inspired by the bold experimentation and achievements we’ve seen in this space and excited by its potential.
Deidre Campbell is global chair, Financial Services Sector.