By Lamon Rutten

Cryptocurrency Trend in Finance

Crypto currencies are a new form of digital asset, developed to meet the needs of trade and finance in today’s internet-supported global economy. Calling it a currency is a misnomer – it is more akin to a commodity than to a currency (and paying with cryptos is like barter trade). The US Commodities Futures Trading Commission officially classified the leading crypto currency, the Bitcoin, as a commodity in September 2015. I will use “crypto assets” or “cryptos” in short in this blog.

Crypto assets are a string of numbers, rather than a piece of paper or a metal coin. Cryptography is used in their creation and transfer to avoid counterfeiting. Cryptos are created and managed in a decentralized manner, using decentralized ledgers and a peer-to-peer technology network. The technology that is most commonly used is known as the blockchain, but newer, less rigid technologies are being developed.

Indonesian Investors on Cryptocurrency Prices

At least 1.5 million Indonesians have already invested in crypto assets. Many of them feel, without doubt, rather disappointed. They picked the wrong time to come in. On 4 January 2016, the Bitcoin traded at USD 441. On 2 January 2017, it had more than doubled to USD 991. In May 2017, price increases started accelerating. By the beginning of June 2017, the price had become 2,794 USD. The beginning of September, 4,434 USD. On 4 December, a price of 13,440 USD was reached. One week later, the price peaked at 17,099 USD… The massive price increase was largely caused by a speculative frenzy, of retail investors who did not want to miss this once-in-a-lifetime opportunity. But by Christmas, the price was already down to 14,275 USD, and by the end of 2018, the Bitcoin was sold at 3,790 USD… Prices have been relatively stable since.

Other cryptos have had similar rollercoaster rides. While there still are investors who become dollar millionaires trading in cryptos, it should be clear to everyone that for cryptos, there is a way down as well as a way up. And investors by now should also be aware of the fact that the vast majority of new cryptos (there are now well over 1,500 cryptos) have no valid use case – that is to say, their value is entirely illusionary.

Is Cryptocurrency Still Worth the Hype?

Does this mean that cryptos are all just hype, and we should now just forget about them and go back to the normal assets? No. In fact, now that the craze of trading cryptos has died down, we can perhaps start focusing on what one can actually do with cryptos – other than holding them and hope they will increase in value. I believe that cryptos will be a major building block for reorganizing the economy, to make it more inclusive, more competitive, more productive, and more sustainable.

Bitcoin, the oldest of the main cryptocurrencies, is still the giant in the room. Its market cap on 18 March 2019 stood at 69.7 billion USD (of which 40% is held in less than 2,000 wallets), far ahead of Ethereum (14.5 billion USD) and XRP (12.5 billion USD). Four other cryptos had a market cap of 2 to 4 billion USD (EOS, Litecoin, Bitcoin Cash and Stellar), and 3 more came in at 1 to 2 billion USD (TRON, Cardano and Bitcoin SV). Bitcoin is meant to be a store of value. Its production logic replicates that of a gold mine that is gradually running out of ore. As long as Bitcoin is used as a currency (there is little else that it is good for, as Bitcoin transactions are rather slow and expensive), they will retain their value. Whether Bitcoin is indeed the electronic currency of choice in the future remains to be seen, but it is still far ahead of its contenders.

But most of the other main cryptos do not aspire to be currencies, but rather, building blocks for the new economy – like copper, cement, rubber were in the past. For example, Ethereum is the basis for smart contracts (which support for example safe payments for import/export trade, transparent ownership titles, new small-scale financing schemes as well as consumer-safe supply chains). XLR and Stellar support easy international money transfers, in support of Indonesia’s small and medium importers and exporters as well as its workers abroad who wish to remit money home. TRON democratizes the generation of digital entertainment – every content creator can now be paid without any need to pass through and pay one of the giant companies that now dominate this space (like Google, Youtube, Apple). Ada (Cardano) currently looks as the most promising vehicle for financial inclusion, for banking the unbanked and giving them access to the same financial tools that the rest of us take for granted. Iota enables micro-payments, which in turn will be a major driver for generating and handling big data. And so on…

A Clearer View on Cryptocurrency as Investment

Just two examples of what you can do – already now – with cryptos. First, road maintenance. It is expensive, administrative costs are high, there is too much leakage of funds, and the government often gets rather poor value for its money. Combine two crypto currencies, and you can revolutionize the way Indonesia maintains its road network – reducing government expenditure, costs of car/truck/bus maintenance, and transport costs.

With smart contracts (using Ethereum), enterprises or communities can be paid not for work, but for results – they are paid automatically each day that the condition of the roads is good, and their payments are reduced or even, their contracts terminated, when the road conditions fall below certain benchmarks. No bureaucrat involved, all payments are automatic! 

To determine the road conditions, drivers are encouraged to download a piece of software into their smart phones that will report on the bumps in the road (your phones detect these), together with the GPS data on where these bumps are; they will be encouraged by being paid in Iota, a crypto tailored to micro payments. In other words, you can earn money just by driving around with a phone in your pocket… Large mining companies already use this method to automatically detect potholes in their mining roads, because they know that it is much cheaper to repair roads than to repair trucks…

Another example: Ripple’s XRP makes remittances sent back home by Indonesia’s migrant workers faster and cheaper. Much cheaper. Remittances into Indonesia have reached some 10 billion USD per year. According to the World Bank, as short ago as the first quarter of 2018, when transferring 200 USD, migrants paid an average fee of 7.1 per cent – for Indonesia, that would be 710 million USD paid by its migrants, but not received by their relatives and friends in the country. Now, with XLR, it will be possible to slash this cost by at least two thirds. And even those without bank accounts can easily send money to recipients who are equally without bank account – they just need a mobile phone.   

And there are many, many more examples of how cryptos can radically improve the functioning of the Indonesian economy. Secure land titles, supply chains delivering healthy food to consumers, supply chain finance for small and medium-sized companies, peer-to-peer investment networks, more efficient transport markets, new ways to fund education… and the list goes on. These are benefits available to economies at any level of development, and in fact, unleashing the power of innovation that can be brought to cryptos will accelerate the growth of lower- and middle-income economies more than that of high-income countries.

It is hard to exaggerate how much our lives will improve thanks to cryptos. Any government that is keen to boost the social and economic development of its people should roll out the red carpet for the innovators and entrepreneurs who want to put cryptos to use – it should recognize their importance, reward them, empower them, facilitate their businesses including through a supportive legal and regulatory framework...

Not allowing cryptos to be used as currency is fine, there are many more powerful use cases. But entrepreneurs should be able to buy, sell and store cryptos safely and at a low cost, and they should have access to a crypto futures market where they can lock in the future value of the cryptos they need or that they expect to earn. While investors should be protected against unscrupulous issuers of new cryptos, repressing the development of crypto assets is tantamount to depriving people of one of the most powerful tools for social and economic improvement that now exists – and importantly, it is a tool that is available to anyone with intelligence, willpower and access to the internet. 

Unleash the power of cryptos, and you will unleash the power for growth that now lies locked up in millions of Indonesians, in thousands of villages and towns.