We asked other experts in the tax law and cryptocurrency fields what Bitcoin and cryptocurrency challenges users can expect to see in the near future and compiled some of the most interesting results here for our readers. As you can see, most of the experts who weighed in expect technical challenges, regulatory issues, and more volatility possible in the coming months. Here’s what they had to say.
Cryptocurrency is wealth born out of technology. Jerry W. Thomas, President and Chief Executive of Decision Analyst, Inc., comments: “The brilliance of Bitcoin is actually the blockchain technology that underlies the currency. It is among the most secure online technologies available; it is virtually impossible to hack, manipulate, or thwart.” However, being inherently situated in new technologies brings its own kind of problems. Ric Edelman, co-founder and executive chairman of Edelman Financial Services, cites the investing challenges that come along with cryptocurrencies as a prime example of this issue. “There is no easy vehicle (such as ETFs) for retail investors to invest in crypto assets such as Bitcoin, while fees, safety and liquidity continue to be an issue.” Cristina Dolan, Co-founder of Ixledger, sees Bitcoin’s glacial speed and lack of efficiency as part of its legacy as grandfather of all cryptocurrencies. “The biggest challenge is finding ways to improve the UI and protect the keys—usability enhancements that happened with internet access that no longer requires modems and other clunky interfaces to login to access apps and email. If the community comes together and adapts the lighting network for speed and smart contact capabilities, it could convert into a rejuvenated architectural block in some of the big disruptive business models and not just stored value.”
Cal Cook, Finance Investigator at ConsumerSafety.org, agrees that Bitcoin’s main challenge is technological—specifically, a scalability challenge. “The Bitcoin network currently only processes a handful of transactions per second,” states Cook. “To achieve widespread adoption, Bitcoin needs to process factors more than this.” Joshua Reyes, CMO and Co-Founder of Sendy Network, agrees that scalability is a serious ongoing issue for cryptocurrencies. “At the moment Bitcoin is able to process around 3-7 transactions per second. This is minuscule compared to VISA and MasterCard which has the capacity to process around 2,000 transactions per second. This is going to become an increasingly large headache as more people move to cryptocurrencies and make transactions with Bitcoin.” Some of the experts also see potential solutions to these technical issues on the horizon—and in some cases, more challenges.
Cook comments, “It would be quite easy to make Bitcoin more scalable by removing the block size cap. But there is an ideological divide in the Bitcoin community, with the camp in power wishing to preserve Bitcoin as a store of value, with high fees and lower potential transactions per block.” Reyes adds, “The industry is working on solutions to [the slow processing issue]. Both SegWit and Lightning Network are examples of projects aimed at speeding up the process.”
There is no question that cryptocurrencies face steep regulatory challenges. This is not only to say that there are regulatory stops for users of Bitcoin, including hurdles prompted by the wrath of traditional banks, but also in some cases there are a lack of regulatory protections for would-be cryptocurrency investors.
Hugo Renaudin, co-founder and CEO of LGO Markets, sees the first challenge for cryptocurrencies as a regulatory one. “Bitcoin needs to be clearly classified as a commodity, a security, or something else. This lack of regulatory status is preventing large investors to buy and use Bitcoin. Another challenge is network scalability, which will hopefully be solved by the Lightning Network. Once these two challenges are overcome, Bitcoin will be on the path to broad mainstream acceptance.”
Cook describes the regulatory landscape as follows: “The secondary challenge that Bitcoin faces is regulatory. While most major countries haven’t outright banned the cryptocurrency, it is in a legal grey area in many jurisdictions. If Bitcoin becomes more popular the chance of a ban becomes more likely, as banks will lobby to retain their influence over the monetary order.” The lack of regulatory stability is, no doubt, related in some ways to the volatility or the market—which we’ll get to next. However, this unusual regulatory situation has also enhanced the need for experts who understand what the market and regulations look like day by day. This is a specialty area coexisting in tax law and accounting, so make sure when you consult an expert, you’re asking someone with established expertise in both areas.
One of the most notable things about cryptocurrencies is that they are volatile, unstable. This makes them appealing; we know their value can rise dramatically. This also makes them dangerous, because we know the bottom can drop out at any time.
Thomas describes the problem of cryptocurrencies and volatility as a matter of faith: “Faith is what gives a currency its value. . . . The creator of Bitcoin, whoever she or he is, wowed the world with dazzling new technology and used technology’s ‘smoke and mirrors’ to overcome our doubts and boost our faith. Rising faith in Bitcoin led to its rising prices. These rising prices created more credibility and more faith, and even higher Bitcoin prices. Faith becomes easier and easier as the price rises higher and higher. And, when we want to believe—when we want the story to be true—our faith becomes even stronger. As our collective faith grows, the price of Bitcoins [or any other cryptocurrency] will continue rising, until one day the price will crash. . . .”
For Edelman, the lack of regulation is connected to the volatility problem. “Despite the SEC’s increasing interest in cryptocurrencies, there is still no regulation in the marketplace leading to volatility, which has created an environment for ripe for bad actors to exploit unsophisticated investors.” Reyes puts the volatility problem in context, comparing Bitcoin to other challenging cryptocurrencies. “While not a technical issue, the immaturity of crypto markets result in massive fluctuations in the price of Bitcoin compared to the US dollar. This is putting off a lot of people from using Bitcoin as a currency and is instead attracting speculative investors looking to make a quick profit. For Bitcoin to become mainstream it must first deal with this issue by stabilizing its price. . . . If Bitcoin cannot adequately address these challenges before other cryptocurrencies do, then the long term viability of Bitcoin will be at stake as people gravitate away from Bitcoin toward other cryptocurrencies.”
Pavel Cherkashin, co-founder and a managing partner at Mindrock Capital and managing partner at GVA Capital, sees the high volatility and speculative value of Bitcoin as a notable limitation. “The [volatility] leads to the situation when it doesn’t make sense to use Bitcoin as a means of payment, only as a tool to enter or exit the market.” Edelman recommends both education for investors and advisors and the right mindset for people investing in cryptocurrencies for now. “Investing in cryptocurrencies is like playing the lottery. If you choose to invest, I recommend investing only 2% of your portfolio and planning to hold onto the crypto assets for years. Most importantly, given the volatile and unregulated nature of the crypto marketplace, be prepared to lose it all.”
Despite the challenges, cryptocurrencies are an exciting new area for investors and those dabbling in the technology as well. Christine Satchell, PhD, Chief Researcher at Blue Chip Vision, sees the cultural relevance of cryptocurrencies as something that will lend them staying power despite a host of challenges.
“Bitcoin is going to reach new heights, and one of the factors that will help this happen is that it now exists as more than just a digital currency. Bitcoin has earned itself the elusive and highly desirable status of having cultural currency, especially amongst the younger generation, who see it as an alternative to the excesses of traditional financial intuitions. A currency embedded with a philosophy that has resonance for a new generation, that’s a pretty powerful thing.”