Experts see the current crypto shakeout healthy for the industry

While some refer to a devastating cryptocurrency crash and an industry in freefall, University of Miami business technology thought leaders categorize the current upheaval as a shakeup, a scenario to be expected for a new and evolving technology and one that will ultimately purify and strengthen the industry.

“This shakeout points to the fact that we can now see that some business models and projects some companies are funding are not working, and that’s good for crypto – and in the long run an important sanitary for the industry,” said Ola Henfridsson, Schein Family Endowed Chair and Professor of Business Technology at the University of Miami Patti and Allan Herbert Business School.

He noted the general trend for people to overestimate what technology can do in the short term and underestimate what it can do in the long term.

“That’s very much the case here,” Henfridsson added. “Because it’s a new technology, a lot of new business models haven’t been tested.”

The same factors are driving the global decline—inflation, rising interest rates, the war in Ukraine and global uncertainty—has led to the crypto decline. Some media reports even point to a perfect storm that has sent cryptos soaring. During the pandemic, people with extra funds flooded into virtual currencies, big banks and hedge funds invested, and now both have pulled away.

Robert Gregory, an associate professor at the business school, noted that one of the biggest takeaways and insights of 2022 is how crypto markets have adjusted to the overall macro environment.

“These ups and downs are very normal, but one thing that is new and that we have realized is the strong correlation between the crypto markets and the broader markets, possibly a sign that there is a very significant involvement of institutional players that was not the case for five years ago, he said.

Henfridsson identified some of the many stakeholders that make up “encryption space”—managers, exchanges, traders which include hedge funds, among others— and said that the potential use of the industry for business or cases is so extensive that it is difficult to talk about the industry as a whole. He emphasized the role played by custodians, a third party entrusted with storing and protecting the currency.

“If crypto is to become a technology or currency that is widely adopted in society, we must have custody solutions. And these custodians must be regulated in the same way as banks, said Henfridsson. “Some more conservative currencies, like Coinbase, have partnerships with banks.”

For Henfridsson, one of the advantages of cryptocurrency is its high security and capacity to resist tampering.

“No one can take your bitcoin, no one can take your wealth, and this is very valuable. But it also means you have to have custody solutions that make it easy for people to hold assets because otherwise you have to know cryptography [for self-custody],” he said.

While decentralized by nature and design, the crypto industry looks to a government or centralized international body to provide the regulatory framework that will protect investors, according to both experts.

“This new technology has faced a regulatory void—the regulators don’t know how to classify it, and it creates a lot of confusion because you can’t apply old ways of thinking and standards to a new technology,” Gregory said. He pointed out that in a similar way that US telecommunications policy in the 1990s paved the way for companies to take advantage of the emerging internet platforms of the time, US regulators will play a huge role in the industry’s future.

Gregory noted that while the internet evolved to be controlled by a few mega-corporations, the current crypto phase is in part an attempt to return to a collectively owned vision that eliminates middlemen to deliver more equitable distribution of wealth.

He distinguished between crypto-believers from the original mission and short-term speculators trying to cash in on the platform’s volatility and compared the current crypto stage to the renaissance of the 14th century.^th– 17^th century – an era where the advent of the printing press and the concept of double booking revolutionized the world in terms of communication and business.

Henfridsson said he sees the crypto industry playing an important role going forward, especially in a world that seems increasingly vulnerable to crises.

“We have to get used to the fact that disasters happen and be in crisis mode,” he said. “We are deglobalising—global economies are threatened by security and supply chain issues, and so we need to produce our own food and have our energy for this new kind of world.”

There will only be a handful of currencies that can survive this development, suggested Henfridsson. And while the US dollar has long been the world’s currency standard, the rise of China and the recent isolation of Russia through sanctions over its invasion of Ukraine has prompted both countries to seek to develop their own monetary systems, he said.

Bitcoin, because it is rural and politically neutral, may well become a strong player in the global economy, the specialist indicated.

“There is no one supporting bitcoin, no Russia, no China, no US, which makes it a very good option for smaller countries to be able to adopt something that is legal tender,” explained Henfridsson. “It’s a powerful thing. Over the next 10 years we’ll see more digital currencies in general, and then it’s more a question of how the traditional institutions like central banks and the International Monetary Fund will shape this new technology.”

Gregory indicated that the next 12 to 18 months will bring clarity to the industry regarding the US regulations.

And Henfridsson predicts a “big, big bull market” when this regulation occurs.

“A lot of investors have been waiting on the sidelines because the crypto space hasn’t been regulated,” he said. “When it becomes legitimate from their perspective, this will be massive for the whole space.”