In 2018, the cryptocurrency market capitalization shrank more than eightfold to $102 billion. But that didn't stop it from reaching a record $2.9 trillion in November 2021. Therefore, there is no single answer to the question "what is the future of cryptocurrencies? Everything depends on their ability to gain the trust of settlement participants and investors, effectively performing the function of money.

How much is your coffee worth?

The price of the most famous cryptocurrency, bitcoin, fluctuates daily by an average of 2.6%, and on some days, the range of prices can exceed 30% (like on March 12, 2020 or May 19, 2021). Such significant fluctuations of most cryptocurrencies make it almost impossible to compare prices of different goods, measure income or savings in their equivalent.

The cryptocurrency market is relatively young, shallow, poorly regulated, with a high concentration of market power in the hands of large players and a significant number of non-professional participants. All this causes extreme manipulation of this market, its sensitivity to situational factors and news, and, accordingly, high exchange rate fluctuations on it. Suffice it to recall how Elon Musk's tweets sent the price of bitcoin up and down by tens of percent in a few minutes, and how, after him, the prices of other cryptocurrencies by ido crypto calendar went up and down.

In response to the problem of exchange rate fluctuations of cryptocurrencies, so-called stabelcoins appeared. In theory, they should be securely backed by official currencies, bank metals or securities, other cryptocurrencies, or a combination thereof. At the same time, in practice, every third stabelcoin fails and disappears from the market.

The fact is that the stability and reliability of stablcoins in the long term depends primarily on the transparency and reliability of their issuers, who cannot always boast of an impeccable business reputation, absence of conflict of interest or sufficient qualification in relevant financial matters. Such nuances cannot but cause concern to investors.

There are also unsecured steblecoins whose exchange rate stabilization is achieved methodically. For example, through the use of "smart" monetary rules, including those based on artificial intelligence technology. However, smart rules could not prevent the recent collapse of the UST algorithmic stablcoin, which increased market turbulence and caused many other stablcoins to lose their bindings.

However, the deviations from parity for most of the secured steiblocoins were small and short-lived. Therefore, in general, transparently and reliably backed steiblocoins, with a favorable regulatory environment, have significant potential to serve as a measure of value and perform other functions of money in the future. But if they can withstand competition from CBDC.

Cryptocurrency payments: (un)convenient, (un)reliable, (un)anonymous and (un)legal?

Technologies based on cryptocurrency payment systems can provide a high level of inclusivity, interoperability and convenience. Payments can be made wherever there is Internet access and at any time. Sometimes there is no need to go through additional verification and registration procedures. In addition, individual cryptocurrency networks create ample opportunities for "programming money.

Critics of cryptocurrencies often complain about the low bandwidth of many blockchain networks (especially decentralized ones) and high payment fees. The average transaction confirmation time on the main bitcoin network is about 8 minutes, with a peak time of 25 minutes. Bitcoin transfer fees can exceed $60 in some periods, regardless of the amount of the transaction.

At the same time, increased competition in the market of payment services and technological innovations contribute to the expansion of bandwidth and solve the problem of high fees for "crypto" payments. The problem of irreversibility of transactions and impossibility of data recovery for access to wallets, which are also usually referred to the disadvantages of cryptocurrency payments, is gradually solved.

On the other hand, the development of technology brings into question the anonymity of "crypto" payments, which some like. There is also an opinion that crypto in wallets, unlike money in bank accounts, cannot be blocked. In practice, authorities can identify cryptocurrency owners and freeze accounts at centralized crypto-exchanges, where most relevant transactions take place.

For example, the cryptocurrency exchange Coinbase has blocked thousands of addresses that could be linked to individuals or entities from Russia, which are subject to economic sanctions. Binance also blocks accounts of individuals linked to high-ranking Kremlin officials. Even decentralized exchanges block addresses associated with illegal and subsanctioned activity.

Crypto-enthusiasts also claim that crypto is almost impossible to counterfeit and extremely difficult to steal from a wallet. However, there are frequent cases of fraud, the so-called "51% attacks," security breaches and operational failures in cryptocurrency networks, etc. The problem is aggravated by relatively low financial literacy of investors, as well as underdeveloped oversight and regulation of operations with cryptocurrencies (scams) amounted to $1.6 billion, and due to hacker attacks, another $1.9 billion (which is 58% more than during the same period in 2021).

Such vulnerability and controversial reputation of "crypto" due to its use in dubious transactions (including regulatory and tax arbitrage), and sometimes in outright criminal schemes, discourages many potential users.

Due to fragmented legal regulation, legal protection of cryptocurrency owners is still weak in many countries. There is often an outright ban on payments in cryptocurrencies for goods and services. Only in El Salvador and the Central African Republic cryptocurrencies have the status of legal tender.

Despite this, the level of "penetration" of cryptocurrencies is growing noticeably. Chainalysis estimates that the total volume of cryptocurrency transactions for 2021 increased by 567% to $15.8 trillion. According to a Bitstamp survey, 79.6% of individual and 72.6% of institutional investors are convinced that cryptoassets will spread widely over the next ten years.

The number of retail outlets where cryptocurrency can be paid for is also increasing evenly. Famous global brands are joining them. Traditional payment systems have also begun to actively integrate cryptocurrencies. In particular, crypto can be used to pay for goods through Mastercard, Visa and PayPal.

According to Visa, in the first quarter of 2022 the volume of transactions on its cryptocurrency cards exceeded $ 2.5 billion. Among Ukrainian banks there are also willing to integrate with cryptocurrency exchanges and issue cryptocurrency cards.

So far, it's difficult to call it a full-fledged cryptocurrency settlement. All transactions pass through conversion to official currencies. But the popularization of such payment products may contribute to the spread of cryptocurrency payments in the future.

Investments in cryptocurrency: what do the numbers say?

According to Chainalysis research, the volume of bitcoins in investors' wallets has grown significantly in recent years and, more interestingly, has significantly exceeded the volume of coins in traders' "speculative" wallets. About 77% of "mined" bitcoins (not classified as lost) have not changed their current address for five years or longer.

According to the Bitstamp survey, 72% of institutional and 73.1% of individual investors plan to grow their investments in cryptoassets in the next five years. About 16% of Americans and 10% of Europeans own cryptocurrencies. Notable institutional investors include Grayscale Investments, Square, Microstrategy, Tesla, Meitu, Massmutual, etc. Banks, in particular Goldman Sachs and Morgan Stanley, also show interest in cryptocurrencies.

Investors paid special attention to digital coins just during the Covid-19 pandemic. In particular, analysts at JPMorgan believe that investors' abandonment of gold in favor of bitcoin during 2021 was due to increased inflationary trends in the world. In this environment, some have even begun to refer to cryptocurrencies as a "safe haven" for investment. However, it is possible that after the bitcoin price falls by 75% and the crypto-assets market capitalization triples, there will be less confidence in the safety of this "safe haven.

Do cryptocurrencies have a future?

There may well be more to come.

The cryptocurrency market and ecosystem are developing dynamically, individual and institutional investor interest and awareness are growing, and transparency of issuers and intermediaries is increasing. All of this will continue to deepen the market, reducing the manipulation and sensitivity of cryptocurrencies to situational factors and news. Under such conditions, over time, the exchange rate fluctuations of cryptocurrencies will decrease.

Advances in technology will contribute to solving the problems of scalability, the vulnerability of blockchain networks to hacking, irreversibility and non-environmentality of transactions. Therefore, it is likely that the convenience, speed and security of cryptocurrency payments will continue to improve gradually.

Thanks to the formation of a legislative field, comprehensive regulation and supervision, cryptocurrencies will receive a clear legal status, and market participants will have the right to legally conduct business and protect their interests.

In all likelihood, all this will contribute to the spread of payments in cryptocurrencies, and their share in people's savings and investment portfolios will increase.

Consequently, the associated risks will grow.