Expert Insight

EXCLUSIVE COMMENT: Myths and realities – the truth around crypto

Blockchain technologies have faced much scrutiny and scepticism from institutional investors and financial bodies over the past few years, with critics claiming they are too volatile, prone to money laundering and completely unsafe. Here, Enrique Alcazar, Blockchain Lead at Virtusa xLabs, seeks to show how statements like this are based more on speculation than facts

From their introduction, cryptocurrencies have been shrouded in controversy. Constantly linked with criminal activity and extreme volatility, they’ve often been written off as too unstable and problematic to be a useful investment option. Investors have naturally been attracted to this space thanks to the ability to generate better returns than other asset classes, but large financial institutions have been hesitant to get in on the act due to the lack of proper market infrastructure around Bitcoin and the like.

However, with cryptocurrencies rapidly moving into the mainstream, financial institutions are acutely aware of the opportunities they could be missing out on. By facilitating investment into cryptocurrencies and building on- and off-ramps between fiat and cryptocurrencies, they could stand to make huge potential gains – yet some are still hesitating. In order to build a market and take advantage of the potential of cryptocurrencies, it’s vital to not get side-tracked by non-issues. Let’s examine and debunk some common myths that are floating around today.

  1. Myth – Cryptocurrencies are unsafe and get hacked

In 2018, both Bitcoin and Ethereum reached a peak in market capitalisation, totalling $300 billion and $130 billion respectively. This presented a great opportunity for hackers, yet neither were hacked due to any weakness in the underlying technology. It’s true that some markets were hacked due to poor stewardship but the blockchain remained secure throughout. As long as banks are investing in proper security measures to safeguard the markets, they can feel confident that the funds will not suddenly disappear.

  1. Myth – Anti-Money Laundering (AML) is impossible because cryptocurrencies are anonymous

While steps can be taken to hide one’s identity online, crypto-assets are not as anonymous as people think. There are some, such as Dash or Monero, which are nigh on impossible to trace but these only make up a little over 10% of cryptocurrency transactions. Others like Bitcoin or Litecoin are actually more traceable than traditional cash because we can view every single wallet involved in the transaction chain. Even currencies like Ethereum and Ripple, which don’t enable auditors to check where a specific asset comes from, still retain a registry of all wallet-to-wallet transactions – something that still provides better traceability than cash.

  1. Myth – Cryptocurrencies are too volatile for regulated markets

While crypto markets have fluctuated over the past few years, we’re now seeing signs of increased stability. For example, the volatility around Bitcoin has decreased substantially since October 2018. Given that we’re now seeing other assets on the NASDAQ being traded at higher levels of volatility than Bitcoin, this argument falls apart. The fact is that Bitcoin products are currently demonstrably more stable than a range of other financial products. We can expect that, if products were to be created for other cryptocurrencies with high liquidity, they would become stable over time as well.

Building a marketplace

Despite busting these myths, investing in cryptocurrency will remain a tricky proposition for now for a couple of reasons. For example, it’s true that cryptocurrencies are still susceptible to market manipulation. The lack of regulation means that “pump and dump” schemes and other scams are commonplace. Unfortunately, the prospect of global regulation seems very distant, but at a national level we’re already seeing steps to protect investors from cyber-conmen.

Beyond the regulatory problem, there are a host of other issues as well, including a lingering stigma about the validity of digital currencies, a lack of knowledgeable professionals in the sector, and the complexity involved in arriving at solid valuations for any digital asset. These are all real risks which should not be ignored.

However, there is always risk when building a new market. Cryptocurrencies represent significant opportunity for incumbent banks and financial bodies to support their institutional clients. Therefore, it is critical that they avoid buying into any of the ‘myths’ discussed here. Instead, banks and other firms need to focus their efforts on addressing genuine challenges, and bringing in the technology and professional skills necessary to create sustainable digital infrastructure which can allow institutional investors to participate in crypto markets. Failure to do so will see them miss out on a golden opportunity as competitors pull ahead.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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