Over the last decade, thousands of digital currencies have come into existence.
While this rapid proliferation has helped illustrate the enthusiasm and innovative nature of cryptocurrency advocates, one can’t help but wonder how many of these projects will survive in the long-term.
Earlier this month, Ripple CEO Brad Garlinghouse told Bloomberg that 99% of all digital assets will “probably” go “to zero.”
He is not alone, as Jake Yocom-Piatt, project lead for Decred, has predicted that “many cryptocurrencies will perish.”
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
This struggle for survival has grown even more intense, as many central banks have jumped into the fold, moving to create their own digital currencies.
Central Bank Race
“At the moment the three biggest currencies in the world are racing to make their fiat digital,” noted Mati Greenspan, senior analyst for eToro.
“So far, China is winning and set to announce the PBOC blockchain and digital Yuan early next year,” he emphasized.
The central banks behind the other two largest currencies, the Federal Reserve and European Central Bank, have failed to generate as much progress, noted Greenspan.
Another player in the game is libra, a digital currency proposed by The Libra Association.
So far, the association, which aims to create a global digital currency and offer financial services to billions who are unbanked, has encountered significant challenges.
Several would-be members of The Libra Association cut ties with the project, and regulators have responded with significant skepticism.
As for how this struggle for dominance will pan out, analysts offered varying points of view.
While the vast majority of digital currency projects might fail, market observers provided a consensus that this won’t produce a winner-take-all scenario.
“Between cryptocoins, corporate coins & state coins, we’re probably not going to end up with 100+ widely used digital currencies,” said Jacob Eliosoff, a cryptocurrency fund manager.
“Network effects will matter & there will probably be only a few winners,” he emphasized.
Marouane Garcon, managing director of crypto-to-crypto derivatives platform Amulet, offered a similar point of view.
“There won’t be a single currency because of too many political differences in the world, but just like fiat currencies some will be stronger in value than others.”
Yocom-Piatt predicted that many digital currencies people think of as being a store of value (SOV), for example bitcoin and decred, will survive.
Benefits Of Competition
At the same time, while many cryptocurrencies may die out, this outcome will certainly have its benefits, he claimed.
“Instead of a large amount of capital and attention spread across many currencies, we will increasingly see that same capital and attention spread across a smaller number of SOVs, leading to a corresponding increase in their value.”
Further, Yocom-Piatt noted that more traditional cryptocurrencies like bitcoin have characteristics that may help them come out on top.
Many prefer cryptocurrencies due to their ability to provide their users with privacy.
Monero and Zcash, for example, have made substantial progress on this front.
Central bank digital currencies, however, “are simply not incentivized to deliver substantive privacy,” noted Yocom-Piatt.
Eliosoff also spoke to this, emphasizing that China is working on a digital currency that will enable “monitoring & state control.”
Obviously enough, privacy is only one of the benefits provided by digital currencies, as these innovative creations offer many others.
While some digital assets “value privacy,” others emphasize transparency, Greenspan emphasized.
“Some are built to scale and some are built for security,” he added.
“Each has it’s pros and cons according to the needs and values of the developers.”
If the vast majority of cryptocurrency projects die out, it could help provide some clarity, by showing which benefits are of greatest value to the market.
While CBDCs may not be as popular as their more traditional counterparts within the crypto community, these government-issued digital assets certainly have potential.
By issuing digital assets that are cryptographically secured, governments might be able to completely eliminate counterfeiting.
Further, by issuing a CBDC, a government could potentially trace every single transaction made using the digital asset.
Between these two benefits, digital currencies issued by central banks could eliminate a great deal “of illegal activity,” noted Garcon.
Past that, CBDCs could potentially assist governments with both “Tax Collection and Money Laundering prevention,” noted Garlam Won, head of marketing for blockchain startup Harmony.
By harnessing CBDCs, governments could “accurately assess the health of the economy and [obtain a] detailed view into which sectors might require more funding and support.”
Armed with this information, governments might use tax dollars more efficiently, he noted.