The belief that cryptocurrencies will disrupt traditional finance is nothing more than a meme – new research from Research Affiliates claims.
In the post, Alex Pickard, RA’s VP of Research, said popular claims about Bitcoin and blockchain have spread through the crypto community, as have visual memes seen on social media. But instead of images with white text, Pickard said these “memes” are statements like “Bitcoin is the future,” “Blockchain is permissionless,” and “You can be your own bank.”
“These memes, along with countless others, function as word-of-mouth marketing to incentivize speculative cryptocurrency investment,” he wrote. But according to Pickard, there are at least three hurdles cryptocurrencies must overcome before they overturn traditional finance.
On the one hand, Pickard said being disruptive is inherently at odds with profitability. To illustrate this, he constructed a simple pricing model, where the price of the cryptocurrency is the sum of its fair value and three premium factors. Widespread adoption of cryptocurrencies would increase their fair value, but significantly decrease the three premiums, he said.
These three premium factors – which he listed as vanguard premium, speculation premium, and byzantine premium – are all associated with the fact that crypto is not yet widely understood by the public.
“Investors read confusing, jargon-laden articles and become convinced that people smarter than them are investing, so they should too,” Pickard wrote. “Simplicity does not inspire investment the way complexity does.”
Once the confusion over blockchain technologies clears up — a prerequisite for any innovation to be truly disruptive — the bounties would no longer exist, thereby driving down the price of cryptocurrencies, Pickard said.
The second obstacle, according to the vice president of Research Affiliates, is that traditional financial institutions are simply too big to hand over the reins to blockchain technologies. Citing the Lindy effect, which states that the future life expectancy of a non-perishable product depends on its current age, Pickard found that the life expectancies of the Federal Reserve and Bank of New York Mellon, the highest former Bank of America, are 8.4 and 18.3 times longer. than that of Bitcoin, respectively.
“‘Crypto will disrupt traditional finance’ and ‘Bitcoin is the future’ are powerful memes that have successfully encouraged people to buy bitcoin and other cryptocurrencies for the past 10+ years, but the power of memes has hardly made a dent in the power of traditional finance,” he writes.
The final hurdle lies with the crypto community itself. Pickard argued that while early crypto investors enjoyed the actual use of Bitcoin, later-stage investors now focus more on speculating on its price.
“Bitcoin’s early days presented the opportunity for bitcoin advocates to pave the way for imitation in the use of bitcoin; however, we have seen bitcoin speculation and copycat cryptocurrency instead,” he wrote. “If people believe cryptocurrencies are the future, and it gives them hope, a sense of community, and inspires investment, that’s a golden hen. Disruption would kill the hen with golden eggs.
Yet, despite all the hurdles, Pickard believes there is still investment value in cryptocurrencies, as disruptions aren’t going to happen anytime soon. In the short term, simply betting on the price of cryptocurrencies based on exogenous factors and ignoring their real use value could still generate profits.
“People will continue to bet on the price of cryptocurrencies,” Pickard concluded. “After all, they are excellent speculative vehicles. While speculation happens in most markets, in cryptocurrency speculation is the market.