The Rise of Cryptocurrencies—Will the Bitcoin Bubble Burst?February 6, 2018
Cryptocurrencies like Bitcoin, Ripple and Ethereum have been making headlines lately for their record-breaking increases (and vacillating decreases) in value. But to the average consumer, cryptocurrencies still play little if any role in everyday life—leaving them largely shrouded in a cloud of dark-web mystery. So what exactly are cryptocurrencies? And what role could they play in mainstream markets in the future? Retail News Insider set out to learn more—and some insights may surprise you.
The simplest way to understand cryptocurrencies is to think of them as “a way to securely send or receive money directly between two parties without needing a bank to facilitate,” explains Nick Timon, a growth consultant with advertising technology firm Precise.TV, who has 20 years of experience working in early-stage technologies.
That’s the easy definition. To really understand how cryptocurrencies differ from cash and other currencies, you have to get a little more technical. First, let’s start with the technology cryptocurrencies are built on: blockchain.
Blockchain is a digital ledger system (think a giant spreadsheet) that allows users to create records (“blocks”) that are linked and secured using cryptography—an extremely hard-to-crack form of coding or encryption. The ledger system isn’t stored by any single machine or service like a bank; rather, this digital ledger system is continuously updating copies that are hosted by millions of computers around the world all at the same time. The entries can only be edited by owners who have a personal key to decrypt them. This means the information contained in the ledger is widely verifiable and hard to hack or falsify.
In the case of cryptocurrencies, each “block” in the ledger has an established value. So by giving someone the personal key to a block they own, users are able to transfer that value—and only that value—via the highly-secured blockchain system. Anyone who’s ever been a victim of identity theft or paid for something online only to have their credit card stolen and charges racked up can see the upside of that. Add the potential of reducing or eliminating bank or credit card fees and the allure of the blockchain system is only heightened.
“The major benefit [of cryptocurrencies]… is a much lower transaction cost,” says David Yermack, Professor of Finance and Business Transformation at New York University Stern School of Business. “Typically, credit card companies charge a hidden fee of about three percent per transaction, an amount that is paid by the merchant but passed on to the consumer.” With cryptocurrencies, that fee can be eliminated—potentially leading to savings for retailers and consumers.
Where We Stand Today
With these types of costs savings and security benefits, why aren’t more consumers and retailers using cryptocurrencies? While Bitcoin and other cryptocurrencies have been getting a lot of press lately, “the technology isn’t ready for prime-time,” says Christian Catalini, Assistant Professor of Technological Innovation, Entrepreneurship and Strategic Management for Massachusetts Institute of Technology (MIT). “We are at the early stages… A lot of this is still being incubated. But in the next couple of years, we could start to see more.”
Even Kyle Samani, who, as co-founder of cryptocurrency hedge fund Multicoin Capital, is naturally bullish on the technology, admits: “the last use case for cryptocurrencies will be U.S. consumers [using it to buy their daily coffee]. This is very far away.” That’s because one of the biggest drawbacks of cryptocurrencies today is the length of time it takes to verify transactions (aka send the money). For example, depending on how many other people are using the system, it can take anywhere from 10 minutes to several hours to complete a Bitcoin transaction, according to Blockchain.info. That’s far too long to wait for your morning brew.
So why all the hype and run up in cryptocurrency values? A combination of factors are at play—including proponents betting big on the potential of what the technology could become and financial speculators looking to profit off market run-ups.
“It’s like the Internet was in the late 1990’s before the dot com crash,” says Timon. “People know it’s going to be big but [they’re] not sure how. There will be a few very big winners, a few high profile losers and many small time losers.”
What the Future Holds
Though they may not be ready for the mainstream quite yet, experts largely agree that more widespread use of cryptocurrencies is not a matter of if, but when. Still, opinions on exactly how they will be used vary. For example, both Yermack and Catalini say that while the prospects for cryptocurrencies to make headway in online transactions and international money transfers is good, they’re unlikely to supplant the usual forms of money people are used to using at brick-and-mortar checkout stands.
Timon, on the other hand, isn’t ready to sell cryptocurrencies quite so short. “What the Internet did for information transfer, blockchain and cryptocurrencies will do for value transfer. This has the potential to be far more disruptive to everyday life than the Internet,” he says.
Regardless of where they stand on cryptocurrencies, one thing experts do agree on is that the underlying blockchain technology has real potential to be a game-changer in many other areas of the retail industry.
“When you think about consumer goods, anything that has to do with provenance—supply chain, quality, labeling—a lot of the data could be verified in a much more secure manner [using blockchain],” says Catalini. This is because the data can be saved in a virtually un-hackable and un-falsifiable way, which could help with everything from improving transparency for consumers, to reducing fraud, to more quickly pinpointing sources of contamination in a supply chain.
Blockchain could also be used to reduce marketing fraud. “It is well known that the digital ad ecosystem is plagued with fraud,” says Timon. “Blockchain technology can be used in the fight against digital ad fraud by creating a transparent record of where ad impressions occurred and whether they were fraudulent or not. Currently anything up to 50 percent of retailers’ ad budgets are being wasted on fraud so the savings could be significant.”
Its ability to protect privacy could also make blockchain useful from a retail marketing and loyalty standpoint. “Retailers are increasingly looking to deliver an ever more personalized experience for customers. However, this is often hampered due to privacy issues. Cryptocurrencies and blockchain can help,” says Timon. “Blockchain offers customers a way to securely hold their personal information, allowing [them to] share only what they want with the retailer. In return, the retailer can more accurately personalize products but also reward customers for sharing their data with cryptocurrency payments.”
It seems arguable that nearly any retail activity that relies on data is ripe for disruption thanks to blockchain technology. While it may still be an early-stage and growing technology, retailers would be wise to pay close attention and to begin considering the potential benefits. As Timon puts it, “blockchain is potentially a big leveler for those retailers looking to compete in an increasingly Amazon-dominated world. Where Amazon has created a centralized service to allow customers to discover and buy products, blockchain allows retailers to operate in a whole new decentralized and transparent way. It won’t happen overnight but steady investments based on realistic ROI targets should be considered.”