HODL, as an acronym for "hold on for dear life," has become a mantra among cryptocurrency enthusiasts – and with good reason.
Cryptocurrencies, also known as digital currencies or virtual currencies, are a form of digital money. They allow payments to be made electronically and function in a similar way to standard currencies that use physical cash. However, unlike standard currencies that can be exchanged physically using notes and coins, cryptocurrencies are only exchanged electronically using lines of computer code. Crypto assets have been described by the Central Bank of Ireland as "highly risky and speculative" and the regulator has advised people investing in them to be prepared to lose all their money.
“People should also be aware that if things go wrong, you do not have the protections you would have if you invested in a regulated product,” Central Bank director general financial conduct Derville Rowland points out. Indeed, the destruction of value in cryptocurrencies in recent times has been staggering, with close to €1.4 trillion in cryptocurrency value erased since November. Bitcoin and ethereum, the market’s bellwethers, are both down about 60 percent from their peaks. Strikingly, the so-called stablecoin terra and its sister token luna, which together were valued at about €55 billion in recent months, imploded in a matter of days and are now essentially worthless.
Chris Horn, the cofounder, and former chief executive and chairman of Iona Technologies, says the collapse is at least somewhat down to general weaker sentiment in the global economy and the impulse among investors to look for safer ground. “I think in the background of the tech sector there has been a lot of high value stocks, unicorns, a lot of venture capital money going into it, but that in recent times that has come back quite dramatically with tech lay-offs,” he says. “Part of the reason is the equity market is falling as debts and US Treasury picks up. So, there is a general financial pattern of equities – particularly high risk equities like technology stocks – falling, and cryptocurrencies are seen as high risk. “Then there is the Chinese clampdown on cryptocurrencies. There are also energy concerns around them, so I think it is just the cycle of downward sentiment leading it into a spiral.” In terms of where it might all end, Horn believes they will be taken over by national authorities and central banks and become the currency mechanism of choice over a couple of decades.
“The Chinese administration has really gone to town on cryptocurrencies,” he says. “That’s the leading indicator of what will probably happen elsewhere. I know the SEC in the United States is also looking very hard at it. “I think in the medium to long-term it will be brought into the mainstream financial system but with strong regulation. In the short-term, it will continue to be used and driven by private companies and so on. “You will have regulated cryptocurrencies that are regulated by the ECB or the People's Bank of China and other central banks. As things come under regulation, that will put a lot of pressure on the unregulated cryptocurrencies to become regulated or to become illegal. “So, I think inevitably that central bank regulated digital currencies will take over in time. It’s not going to happen tomorrow, but over the next decade that would be my expectation.” In recent months, Silicon Valley venture capital firm Sequoia announced it has launched a crypto-focused fund of $500-600 million in capital. Horn points out that this suggests there are believers still out there.
“There is still a lot of venture capital going into cryptocurrency, which I thought was interesting, that they have been able to get a large venture capital fund raised at this point despite all the portents of doom swirling around the future of cryptocurrencies,” he says. Indeed, another big company, payments giant Stripe, announced plans in recent months to give customers access to bitcoin four years after suspending support for the cryptocurrency.
Elsewhere, Lionel Messi, the biggest football star on the planet, has signed an agreement worth more than $20 million to promote digital fan token company Socios.com. Messi became the latest global sports personality to enter the crypto world following NFL quarterback Tom Brady and NBA star LeBron James and the deal is part of a growing wave of tie-ups between crypto firms and sport. Socios said in a news release that the Paris Saint Germain star, whose move from Barcelona in August included a cryptocurrency payment, will be involved in a publicity and promotion campaign for Socios in the build-up to the Qatar World Cup, which starts in November. Closer to home, economist David McWilliams is not buying the hype. “It’s certainly not money,” he says. “That’s the first thing to appreciate.
“It doesn’t serve the purpose of money because money is currently universally accepted, and bitcoin is the fad of a couple of hundred thousand people whereas money serves the interests of several billion people. “It’s a speculative asset. It is also an asset with no income, which is always a very worrying thing. If you’re buying an asset with no income, its value is basically what the last fella paid for it, or more importantly what you think the next fella will pay for it. “Money has an income. It’s called a rate of interest. Money is like language. Its usefulness depends on the number of people who use it. At the moment, bitcoin is more of a dialect than a language and I can’t see that really changing.” McWilliams says the “inherent problem” with cryptocurrencies like bitcoin is that they are “manifestly deflationary”.
“That means that as bitcoin continues to rise and rise – and let’s say it does – that means the amount of work you and I have to put in to acquire that money rises and rises,” he says. “So, it undermines the rest of the economy. When something is inherently deflationary, it cannot function as money.” McWilliams is just as sceptical about the future of the sector as he is dismissive of its current place in the global marketplace. He adds: “Is finance going to change because of technology? Absolutely. Is bitcoin a technology? Yes, it is. Is it part of the great story of money going back 10,000 years? Yeah, it probably is. It’s a line or two in that story.
“Is it going to change the world and elbow out money that is printed by central banks? I really don’t think so.
“The only thing that keeps it up there is the belief that somebody is going to pay you a little bit more. I’m not sure that many people believe this is going to replace the dollar or the euro or whatever. “My own impression is that it is on the margins of the financial industry, and it is not going to make that transition to being a usable, workable currency. I think it’ll be knocking around the nether regions of finance until it isn’t.” For now, though, cryptocurrencies or digital currencies remain very much on the agenda of central banks and national authorities. On a recent trip to Dublin, Dr Fabio Panetta, a member of the executive board of the European Central Bank, said a "digital euro" could be launched within four years. The digital euro would be an electronic form of money issued by the ECB and the national central banks of the euro zone and would be accessible to all citizens and firms.
He said the increasing popularity of non-cash payments and the expansion of crypto assets reveals a growing demand for immediacy and digitalisation. “If the official sector – central banks and supervised intermediaries – do not satisfy this demand, others will,” he said. “For this reason, countries around the world are currently exploring the issuance of a central bank digital currency. “Digital money issued by the central bank would offer the possibility for everyone to use public money for digital payments. It would be a sound, reliable means of payment designed in the public interest.
“A digital euro would serve as an instrument to accompany the ongoing digital transition in payments.”
Away from the trading world of cryptocurrencies is the technology underpinning it. Mark McLaughlin is chief executive of Irish start-up Coras, a global distribution platform that enables suppliers to pool their ticket inventory and lets online brands get real-time access. The group has recently launched an app called Fida, which is aiming to transform how loyalty schemes work by offering digital tokens that are exchangeable for tokens from other companies or redeemable for goods and services. “The idea is that if Tesco has a loyalty token, you can exchange it for an Aer Lingus token,” he says. “They are tradable loyalty tokens.
“Then if you want to give them to your partner or your friends, or if you want to convert them into stablecoins you can actually cash out of them. Big brands will have their own tokens and they will effectively be brand currencies. “If you take a long-term view and ask ‘does this technology facilitate new business models’, the answer to that is probably yes. So, you therefore move away from the speculative side and the volatility and focus more on what the underlying technology can do. “I went down a crypto rabbit hole in the past year or so and the interesting thing for me was that there are so many opportunities that haven’t been availed of yet because there has been so much focus on the speculative side.
“There was a lot of money to be made there, but I think the interesting thing now is the products and the technology that can transform all these industries. Let’s try to build the products to do that. That’s the thing that excites me.” McLaughlin also believes that regulation of the sector would be welcomed. “I think people want some sort of regulatory framework,” he says. “A lack of regulation creates uncertainty, and uncertainty inhibits innovation. “It’s like any new technology, you need to have rules and regulations. People need clarity on things. As long as things are sensible and there are protections for consumers, it should be fine. If you bring in regulations, people have certainty. “If you’re a company trying to raise money in the crypto space and you bring in investors, regulation is a question you get asked. But if you can turn around and say ‘well, in Europe, here’s the framework we have’, that’s a much better situation. “Obviously you need to get the balance between encouraging innovation and protecting consumers, but as long as that balance is okay, most of the really smart products that are being built will just adapt to those frameworks.
“For me anyway, once my brain clicked into what tokenisation can do, and realising what the power of it is, you can look at so many industries where there are inefficiencies that exist because concepts are centralised and there is a lot of repetition. “It’s really about using the underlying technology and less about what the value of the products, tokens and different currencies that are out there. The fundamental technology behind it is very sound.”