What does the future of cryptocurrency look like?

Once dismissed as a passing fad, cryptocurrencies are here to stay, and the likes of Bitcoin and Ethereum are set to become part of our day-to-day lives. Here's what the future would look like.

It's hard to think of a topic in the financial world that has sparked as much discussion, debate and controversy over the past decade as cryptocurrency.

And no wonder. For many, their first introduction to cryptocurrency, and Bitcoin in particular, will have come in the early 2010s through headlines about its use in funding illicit purchases made on underground marketplaces such as Silk Road.

Others may have watched the wild run-ups in 2018 or 2020 when investors jumped on the crypto bandwagon, only to see the value of their investments nosedive. And some will have read about the numerous scams and scandals that have plagued the sector in recent years.

It's fair to say, then, that there are plenty of people who view cryptocurrency with a healthy dose of scepticism, especially when it comes to names like Dogecoin, Polkadot and Tron.

There is, of course, the other side of the coin. Cryptocurrency has delivered substantial returns and, in a handful of cases, serious wealth to some investors. It also represents a future payments world which, some hope, will be less beholden to traditional financial players and middlemen.

Love it or loathe it, one of the big questions is whether cryptocurrency is here to stay. At this point, it's hard to argue that it isn't - an argument that has been lent more credence by some 
major recent decisions from financial agencies and governments.

Most notable among those is the US Securities and Exchange Commission's decision to greenlight the first crypto-backed spot exchange traded funds (ETFs), which - though not the intention of the SEC - has boosted the legitimacy of certain cryptocurrencies as an investment vehicle in the eyes of some.

So, for the crypto curious or crypto latecomers, what is worth knowing about cryptocurrency itself, the technology behind it, its popularity as an asset and its potential as a payment tool? Let's dig in.

What is cryptocurrency? 

Cryptocurrency means different things to different people, but looking to the Reserve Bank of Australia, the central bank describes cryptocurrencies as digital currency that allows people to make payments directly to each other online.

Ultimately, though, because they have 'no legislated or intrinsic value', the RBA states that cryptocurrencies are only worth what people are willing to pay for them.

For Karl Mohan, the general manager, Asia Pacific, of cryptocurrency exchange Crypto.com, cryptocurrency is ultimately a payment vehicle purpose-built for the digital age.

"If I can synthesise it in a single sentence, it's money created for the digital world. The whole premise of moving money or creating payments in a world that is connected to the internet is, inherently, that there's no trust, right?

"You don't trust the other party; you don't know who they are. But to be able to transact with each other is what cryptocurrency does. That's its basic, fundamental value. It enables consumers to transact with each other in a world where you don't inherently know or trust the other person."

As Mohan explains, this theme of trust has been at the core of cryptocurrency's evolution since it first came into the world. "If we go back to 2008 and 2009, the genesis of cryptocurrency was the loss of trust in the banking system during the GFC when banks in the US and UK were collapsing and receiving massive bailouts.

So, in their original hypothesis, the creators of Bitcoin talked of replacing the flawed financial system at the time."

Since its beginnings, Bitcoin and other cryptocurrencies have evolved to the point that, according to Mohan, they're now largely viewed as having two different purposes or uses.

The first is a store of value, which is obviously part of the reason they've proved so attractive with some investors. The second, and arguably less adopted use so far, is a payment instrument.

Is cryptocurrency more than Bitcoin?

The cryptocurrency universe is vast. The price-tracking website CoinMarketCap, for instance, is currently tracking more than 10,000 crypto assets,  though many of these are relatively tiny and infrequently traded.

The most prominent though is, without a doubt, Bitcoin. Aside from its name recognition, Bitcoin has the largest market cap of any cryptocurrency: more than $2 trillion at the time of writing.

To give some context to that figure, it's three times larger than the second-largest cryptocurrency by market cap, Ethereum ($680 billion), and a whopping 84 times larger than the tenth-largest cryptocurrency by market cap, Cardano ($24 billion).

While there are simply too many different assets to name, one useful way to break down the world of cryptocurrency and crypto assets is by type.

Like defining cryptocurrency itself, grouping different assets (such as altcoins, stablecoins and meme coins) can be a bit subjective, but Mohan thinks it's worth highlighting three broad categories.

"The behemoth is, of course, Bitcoin, which accounts for roughly 70% of all cryptocurrency market value. The next category is what I'd call smart contracts or 'Layer 1' blockchains. Ethereum is one of them, and they can be thought of as computer-based systems that have their own tokens to reward.

"The third is stable coins, which are paired against currencies like the Australian dollar or US dollar. Think of them like a digital bank cheque that is good for the value it represents. So, let's say you wanted to pay someone $US100 dollars. Rather than sending them cash or making a bank transfer, you could choose to pay with a stable coin such as Tether or USD Coin."

Where does blockchain fit in?

An understanding of the various uses and types of cryptocurrency is important, but it's hard to really get to grips with crypto without understanding blockchain. After all, it enables cryptocurrency to exist.

Blockchain is the underlying technology: the decentralised digital ledger that records cryptocurrency transactions using a network of computers and is fundamentally transparent.

Amy-Rose Goodey, chief operating officer at Blockchain Australia, the industry body that advocates for the technology, sees a blockchain like a series of notes.

"The way I envisage a blockchain is like a notepad where you record your transactions. You can think of every page in this notebook as a block, so all of these pages together make up the blockchain.

"Every time a transaction happens it gets added to a new block, and once a block is full, or the notepad is full, it just gets linked to another different pile of notebooks.

"And no one can ever tear a page out because it's encrypted - it can't be changed. But it also can't be changed because millions of people all over the world have copies and are powering this network.

"So that decentralised nature and the fact that you can't change anything is really what makes it special," says Goodey.

In the case of Bitcoin, so-called 'miners' play a crucial role in validating transactions made on the Bitcoin blockchain. For instance, when someone makes a transaction, it needs to be verified and added to the blockchain, so miners compete to facilitate this process in exchange for a reward (Bitcoin).

How many Aussies invest in crypto?

As the world of cryptocurrency has grown in size and prominence over the past 15 years, it's hardly surprising that many Australians have decided to dip their toes in.

The exact number, though, is hard to pin down. In 2021, for instance, the Australian Taxation Office estimated that more than 600,000 taxpayers had invested in various crypto assets in recent years.

More recently, research by crypto exchange Swyftx in 2023 found that Australians were among the largest adopters in the world, with 23% of adults reportedly owning crypto or other digital assets. Meanwhile, Swyftx found that, as of July last year, nearly a third of Australians were holding crypto assets.

Whatever the true number is, it's fair to say that a decent number of Australians are holding cryptocurrency. But what does that mean in practice?

There are a couple of different ways to hold crypto assets. The first is through a custodial wallet. These are typically offered by third parties such as cryptocurrency exchanges, which ultimately have custody of the assets. They are generally an easy option for newcomers to use, though if something goes wrong with the exchange, users can lose their holdings.

Non-custodial or private wallets, on the other hand, give crypto holders full control of their assets. They may prove harder to set up for some, though, and users will need to ensure that they don't lose access to their private keys lest they be locked out of forever.

Holdings can also be kept in a 'hot' wallet connected to the internet through an online platform or a mobile app, or in a 'cold' wallet, which is a hardware device that is largely kept offline.

Is paying with crypto a novelty or an innovation?

Much of the focus on cryptocurrency has been on its value as an investment.

"The fascination with these currencies appears to have been more speculative (buying cryptocurrencies to make a profit) than related to their use as a new and unique system for making payments," the Reserve Bank notes on its website.

That's not to say there aren't people who have dabbled, or continue to use, crypto as a payment tool though. Haseeb Ikram is one of them.

"I've used crypto to make payments, like buying coffee in the US," he says. "I've used it to transfer money as well, mainly because it's a cheaper and more convenient option compared to transferring bank-to-bank to an overseas country."

In April, Crypto.com launched a new venture with the Adelaide Crows AFL club to facilitate crypto payments for food and drink at the Adelaide Oval. But, realistically, the number of businesses that accept cryptocurrency in Australia are few and far between.

For Crypto.com's Karl Mohan, though, the potential of cryptocurrency as a payment instrument is huge, whether that's paying for everyday goods and services or making transfers abroad.

"Payments are critical for the lifeblood of our economy and cryptocurrency is perfect for payments. The reason being is the speed of transfer because you can program it to transfer based on certain criteria, and there's no repudiation.

"It also removes all sorts of intermediaries. For example, my parents are in Malaysia and sending them money can sometimes take three days. But with cryptocurrency, it arrives instantaneously.

"So, the future of cryptocurrency is definitely in payments. That's my belief."

How are banks reacting?

Cryptocurrency may have been conceived as a disruptor and alternative to the banking status quo, but traditional financial institutions have certainly begun to explore the possibilities that cryptocurrency and related technologies present. At least, in some ways.

Australia's Reserve Bank, for one, has been exploring use cases for a Central Bank Digital Currency (CBDC). In theory, the RBA says this could act like a digital equivalent of cash that would be issued by the Australian government and used for both in-person and digital transactions.

In its latest research paper published in April, the RBA noted that while Australians are interested in the potential privacy benefits that a CBDC could offer, they're not particularly fussed about it being government-issued given that there's already a substantial level of trust in commercial banks.

A handful of Australian banks have also been making moves in the digital asset space, with both ANZ (A$DC) and NAB (AUDN) experimenting with their own Australian dollar stablecoins.

In many ways, blockchain appears to be the real star to emerge from the advent of cryptocurrency. Blockchain Australia's Amy-Rose Goodey says there are countless examples of blockchain experimentation and implementation among the world's largest companies, and not just in the financial sphere.

"If you think of a blockchain as a foundational technology like the internet, you can build things on top of it like apps and programmable money like cryptocurrency. But, really, the potential is unlimited in terms of what you can build on it.

"So, as a use case, it's across every single industry. And now with all of these other technologies coming out, like artificial intelligence, where proof of where your data came from and where it's going is so important, it's probably the most important time ever for blockchain to be rolled out.

"The immutable nature of blockchain - that visibility and record keeping - is what people are seeking at the moment. We want to know what the truth is, and we want to know the source, and I think blockchain is the perfect mechanism for that."

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