In the past year, bitcoin rose almost ten-fold in value and has renewed interest in blockchain, a type of distributed ledger technology, and in cryptocurrencies, an application or use case of blockchain. But what is driving this increased confidence and how much of it is real?
To explore these questions, Nanyang Business School (NBS) hosted a webinar on 29 April 2021 with speakers, Mr Jimmy Ong, Technology Consulting Partner & APAC Blockchain Leader at Ernst & Young Consulting; Mr Gin Chao, Chief Strategy Officer of Binance Holdings Ltd; and Dr Vin Menon, Co-Founder of BCMG Genesis, Bitcoin Fund. The session was moderated by Professor Boh Wai Fong, Deputy Dean, NBS.
Mr Ong began the webinar with a brief history of bitcoin, from its introduction by Satoshi Nakamoto in 2008 through its peaks and falls in the 2010s to its increasing adoption in 2021. Since 2018, a lot more research on blockchain has been done, providing better understanding of the technology and creating mainstream enterprise use cases like supply chain and traceability. Monetary authorities have also begun exploring central bank digital currency (CBDC) and much discussion has developed around decentralised finance (DeFi) and non-fungible tokens (NFT). While the current bitcoin peak may be mainly speculative, Mr Ong suggested that this is also a result of growing adoption and institutional investors’ belief in the stability of cryptocurrency.
Bitcoin cycles and fluctuations
Drawing on Mr Ong’s bitcoin timeline, Mr Chao stated that we are in the fourth bitcoin cycle now. In previous rounds, drops had never exceeded their prior cycles and the pattern indicates that each time there is a peak, there is also an increase in adoption. That said, the 1 percent global adoption rate of cryptocurrencies means that prices will remain volatile (in comparison to fiat currencies). As a result, DeFi services such as staking and lending have emerged as logical options for investors looking to park cryptocurrencies that they are not spending. While most of the world still operates on local fiat currency, Mr Chao believes that this will change as adoption increases, particularly with interest from large institutions. This peak for bitcoin, Mr Chao concluded, can be seen as a combination of technology, macroeconomy environment, and human psychology catching up to the idea of cryptocurrency as a solution to real-world problems.
On trending topics in cryptocurrency, Dr Menon pointed out that central banks have started to create their own CBDCs (e.g. China’s DCEP and Bank of Japan’s digital Yen CBDC trial), which will create a new wave of mass adoption across the globe. On one side, central banks will work on a hybrid mode (where issuance is centralised and distribution is decentralised) and on the other side, there will be fully decentralised currencies like bitcoin. In addition, Dr Menon pointed out that NFT is another trend, citing real estate funds and Christie’s auction of the first purely digital artwork as examples.
Many of the webinar participants were interested to know about the challenges associated with cryptocurrency, particularly in relation to regulators. Mr Ong suggested that regulators may take measures (such as warnings and bans) to safeguard retail investors and prevent an irrational buying rush. Also, as FinTech and mainstream banks start to come on board, regulators need to ensure that the infrastructures and governance are in place. Ultimately, different governments regulate for different reasons — China’s DCEP, for instance, functions as a way to take control back from technological companies. Mr Chao acknowledged that regulators are in a tight spot, particularly when it comes to new technologies. They have to protect investors’ and countries’ interests while the unintended consequences of regulations on new technologies remain unclear. The main issue with new technologies is that there is uncertainty about what people are going to do with it but from an exchange’s perspective, Mr Chao believes that as long as users’ best interests are met, they should be aligned with regulations.
Relationship between CDBCs and cryptocurrencies
With regard to the relationship between CDBCs and popular cryptocurrencies like bitcoin, Dr Menon stated that as more central banks adopt the technology, there will be increased pairings of CBDCs with fully decentralised cryptocurrency, and bitcoin holders may be able to access CBDCs in a faster and more user-friendly way. On the question of whether CBDCs will replace bitcoin, Mr Ong did not think this will be the case. After all, CBDCs are government-regulated while cryptocurrencies are truly decentralised, suggesting that they have a more utility function. Additionally, as cryptocurrency matures and stabilises, more people will use it.
Another recurring question from participants was on cryptocurrency as an investment instrument and if we were in a bubble. While Mr Ong did not think that any concrete claims could be made, he stressed that this was a matter of demand and supply. Mr Chao acknowledged that bitcoin is a good store value at the moment but echoed Mr Ong’s point that investors need to know where the demand is coming from and where it is heading towards. Finally, Dr Menon suggested that to answer this question, potential investors could consider the trend of the past three or four cycles, such as the 7 to 15 percent adoption rates of cryptocurrencies (primarily bitcoin) by public companies. Ultimately, to get more insights into the future of cryptocurrency, investors should keep track of consensus and look at the parties adopting it.