Given the current market collapse, forecasting how the bitcoin sector will grow over the next ten years may seem practically impossible. Critics, supporters, and experts of cryptocurrencies have a wide variety of perspectives on the developing market, from gloomy predictions to betting on a golden age.
PayPal CEO Dan Schulman said at a crypto conference last week that “we are in the early stages of crypto and digital currencies, but we definitely see it as a key element, and a redefinition, of the financial system.” “There will be significant change during the next five to ten years.”
A recent explanation of the short-, medium-, and long-term forecast for the sector was provided by Madeline Hume, senior research analyst at Morningstar.
She said that investors should draw a distinct, apples-and-oranges line between cryptocurrency and conventional investment, saying that purchasing cryptocurrency to learn and explore without anticipating a large return would be the sweet spot. “There are many tokens that will fail and fade away, so I’d even suggest it may not make sense to anticipate a return from crypto at all.”
According on how one views the issue, “I see one significant opportunity or impediment” for each prospective stage in the growth of this new asset class, said Hume.
Regulation in the Near Term
There is still a great deal of ambiguity around cryptocurrency regulation. The Securities and Exchange Commission hasn’t yet permitted mutual funds or ETFs to invest directly in Bitcoin due to concerns about a lack of cryptocurrency regulation.
According to Hume and research analyst Jeremy Pagan’s analysis of Morningstar’s most recent crypto landscape report, “the absence of smart, measured regulation in cryptocurrencies (is) the key barrier to future adoption,” with regulation cited as a “key roadblock” by 55% of financial advisors based in the United States and 39% of institutional investors globally.
Aside from directly acquiring the digital tokens themselves, there are already alternatives for investors interested in cryptocurrencies, such as mutual funds and exchange-traded funds (ETFs) that invest in businesses that hold bitcoin. But according to Hume, these products “don’t follow the asset class especially well.”
Regulators are paying attention, and some people in the area of digital assets who are native to it are actively asking for greater regulation and control, according to Hume. She used Sam Bankman-Fried, the CEO and creator of the FTX bitcoin exchange, as an example.
She said, “or it may destroy it totally, but I believe at this time that’s highly improbable. Smart regulation that protects consumers could assure trust in the crypto market and give it a boost.”
According to Hume, the lack of action from the SEC and the Commodity Futures Trading Commission to stop the spread of these sorts of assets “shows they’re prepared to let these kinds of technologies to evolve and iterate” before taking enforcement action. She said, “They most likely would have done it already” if these authorities intended to stop it before it became dominated by established firms and skyrocketing prices.
In the Mid Term: Growing
In the medium term, ensuring scalability is a major technical problem for the crypto business, according to Hume.
She said that although many crypto systems and tokens have been successful as proof of concepts, “they haven’t always been able to execute at scale.” Hume mentioned significant transaction costs associated with using the underlying blockchain technology, which may increase as more individuals do so in the future.
This year, Ethereum intends to migrate to a new proof-of-stake blockchain, which should need less processing power to confirm transactions. It’s unclear how that move would impact its gas prices, but the latest Morningstar analysis projected that “scalability risks will continue to compound as digital assets rise in importance.”
Hume described the problem as a medium-term technology barrier and said that there is still more to be done to ensure that digital currencies can compete with Visa and Mastercard in terms of transaction speed.
According to Morningstar, the two largest cryptocurrencies, Bitcoin and Ethereum, are far outpaced by the payment processing giants in handling transactions with merchants. Morningstar points out that because blockchain transactions need to be verified by volunteers, the rate at which asset exchanges are recorded in the network’s ledger can’t be as quickly as it would be with other types of networks. To attain broad acceptance, the industry will need to make improvements in this area, according to Hume. It’s a really big task, she said.
Long-Term: Combining the Old with the New
Although it may happen sooner, Hume predicts that cryptocurrencies will likely complement existing financial actors over the course of the next five to ten years rather than displace them.
We anticipate it to develop over time, she added. “It’s our opinion that over time cryptocurrencies will sort of merge with current companies rather than topple them,” maybe appearing in partnerships with established firms to gain a presence in the financial services sector.
According to Hume, established financial institutions now provide Bitcoin as a resource as part of their services.
She also mentioned the decentralized nature of cryptocurrencies and how cryptocurrency exchange Coinbase’s collaboration with Visa for debit cards transforms users’ bitcoin into their local fiat currency during transactions “sort of defeats the entire point” of using cryptocurrencies. But if the community for digital assets intends to be there for the long term, she said, “we expect to see more partnerships between crypto-native firms and an incumbent.”
In a recent research, Morningstar observed that the Visa-Coinbase cooperation hit $2.5 billion in transactions in the first quarter of this year’s fiscal year.
The Morningstar researchers said that cryptocurrency returns “had no analogies to standard risk variables across the stock and bond universes, and the patterns of the market’s returns in aggregate fly in the face of typical market dynamics. They said that the decentralized architecture of cryptocurrencies “put up considerable impediments to real-world use cases.”
We anticipate that future adoption rates in the domain will largely be determined by integration with current systems across the financial services and other industries, rather than a quick takeover.