Last week Christie’s auction house made history at its digital only art sale, with a non-fungible token (NFT) of digital artist Beeple’s work selling for $69 million. This follows hot on the heels of Twitter CEO Jack Dorsey’s announcement that he was selling his first tweet as an NFT, with the current bid now well over $2.5 million. The craze for ownership of digital property can be partially explained by the current bull run on the cryptocurrency markets, with Bitcoin (BTC) at the time of writing standing at $58,335 per coin, up from $29,338 at the start of January. It looks at least in the short term that the price of BTC and other cryptocurrencies will continue to rise, fuelled by concerns regarding inflation caused by COVID rescue measures, institutional adoption by major banks and corporations, and many average Americans putting some of their $1400 stimulus cheques towards the asset.
To the outsider, this can all seem somewhat baffling. It is worth starting with the fundamentals and answering the questions what is a cryptocurrency, and why they have risen to prominence in the headlines? Bitcoin, the first cryptocurrency came into being on January 3rd, 2009 and the real identity of its enigmatic creator known as Satoshi Nakamoto remains a mystery to this day. In the wake of the 2008 financial crash, cryptocurrency was developed as an alternative system of currency which would avoid some of the existing economic pitfalls by having a finite amount of supply all held on a public ledger known as the blockchain, which thereby made counterfeiting the currency nigh-on impossible. Rather than the money supply being control by a central bank, Bitcoin was instead released directly to individuals who ‘mine’ it using their PC GPUs to solve equations which rewards them with a fractional amount of Bitcoin. There is a finite amount of Bitcoin (21 million coins), which means that unlike fiat currency which can be devalued by money printing, in theory Bitcoin will retain its value as its supply cannot be diluted.
Bitcoin itself therefore, is nothing new. In 2018 it suffered from a huge crash in value after the bull run of 2017, meaning that like all existing economic assets it is subject to the laws of the market. Bitcoin has become infamous for its price volatility, which has hampered its adoption as an actual feasible alternative to cash. Several high-profile corporations have trialled accepting Bitcoin payments in the past but have dropped it citing volatility in the price and high transaction fees. This has led to an explosion of ‘alt coins’, other cryptocurrencies vying to supplant or supplement BTC, with over 5,000 alternatives now in existence. It is worth noting that the huge amounts being bid on Jack Dorsey’s initial tweet are not being made in USD, but in Ethereum, one of the alternatives to BTC which seeks to make transactions faster and more affordable.
Cryptocurrencies now have no shortage of celebrity and institutional advocates, with Elon Musk perhaps being the most famous as Tesla recently purchased $1.5 billion in Bitcoin, and announced plans to accept payments for their vehicles in cryptocurrency. Tesla has been joined by a whole host of big names including Morgan Stanley, JP Morgan, Goldman Sachs, and many other heavy hitting banks and financial institutions seeking to offer Bitcoin to their customers. For Bitcoin enthusiasts who are frequently met with the charge that cryptocurrency is simply a fad and a bubble, large scale institutional adoption is a game changer and enthusiasts as well as some analysts predict big buyers could buoy prices up to $100,000 per BTC and beyond.
Herein lies a peculiarity of the technology – though designed as practical usable currency, it has instead become an asset to speculate on in the style of digital gold. Very few actual transactions are being conducted using Bitcoin, and while alt coins offer a host of claims regarding their viability, in the short term it seems unlikely that we will be paying for our shopping in cryptocurrency. Early adopters who made symbolic payments for simple good using Bitcoin are now perhaps experiencing serious buyer’s remorse, as with the infamous case of the $45 million dollar pizza. Likewise, NFTs though sounding impressive, at the current moment amount to little more than vanity certificates stating you own a piece of the internet, so while the technology exists its practical applications are still being worked out. The huge sales grabbing the headlines at the moment are most likely marketing stunts to drive the adoption of the technology. Nevertheless, forward thinking minds in the payment processing space are already looking towards creating robust frameworks for accepting cryptocurrency as a means of everyday transactions. UTP will continue to watch the development of cryptocurrencies and alternative payments with interest, and for those looking to make savings on their existing payments, the best place to start is by looking at our extensive range of payment solutions.