Can We Predict the Future of Cryptocurrency?

What's the future of cryptocurrency? With all eyes focused on the global economic climate and a tumultuous recent history for crypto, it's anything but clear.

We think the following questions are the ones to ask if you're trying to figure out where crypto goes from here. There's a lot to unpack when it comes to crypto's legitimacy, its inconsistent performance, and how likely it is to be widely recognized as legal tender in the future. We can begin with a look at crypto's recent fluctuations in value and what they herald for the future.

Bitcoin’s value serves as a bellwether for public adoption and governmental sentiment toward the crypto industry in general. So how has it been performing?

Bitcoin rose in value by 70% between January 2021 and December 2022. Current analyst predictions estimate Bitcoin will finish out 2022 with an 11% total increase for the year.

And yet, crypto watchers may recall reporting from summer 2022 when crypto collectively fell to prices not recorded in years.

Based on this recent history and analyst predictions, we can probably predict an ongoing steady climb for crypto punctuated with heart-stopping drops, not unlike a roller coaster. Its wildly inconsistent value is one of the chief reasons many forms of digital assets are categorized as investment vehicles rather than legal tender in the United States. That may not be likely to change, although public models for digital currencies may provide a different — and more stable — way forward. More on that in a moment.

Crypto is in an awkward position in the regulation-averse United States. It's being accepted more widely by online retailers and even appears in retirement portfolios, but it's not "backed" by the government the way conventional dollars and cents are.

Despite that, cryptocurrency prices do respond, just like stocks and commodities, to interest rate changes and other actions undertaken by the Federal Reserve.

Additionally, the U.S. Federal Reserve has made public no plans to implement a Central Bank Digital Currency, although it's obvious talks are happening. It's not clear what effect a centrally banked cryptocurrency would have on the competition — including Bitcoin and Ethereum — but having a public or quasi-public option could depress their value or even make them obsolete.

The U.S. is not the world, however. In a world first, El Salvador officially recognized Bitcoin as legal, government-backed tender.

Other countries that permit transactions using existing cryptocurrencies include Denmark, France, Germany, Iceland, Japan, Mexico, Spain, and the United Kingdom. Some countries with implicit or absolute bans on doing so include Bahrain, Georgia, Vietnam, China, Egypt, Iraq, and Tunisia.

Democracy is a process, and it's working more quickly to recognize crypto, in an official capacity, in some territories than others.

When El Salvador recognized Bitcoin as legal tender, it was considered an experiment. Some reporting indicates that experiment has failed.

As of September 2022, President Nayib Bukele's so-called "Bitcoin City" — a tax shelter and apparent playground where affluent crypto investors could "make all the money [they] want" — hasn't taken off. After a year, none of the city's lofty infrastructural or economic ambitions had materialized.

There's a step beyond governments recognizing existing cryptocurrencies like Bitcoin, Litecoin, Ethereum, and Ripple as legal tender: Issuing their own digital currencies. As of September 2022, the list of nations actively pursuing or finalizing this course of action includes:

Despite banning existing cryptocurrencies, China launched its own digital currency — "eCNY," or the "digital yuan" — in April 2020. It exists in a separate category from Bitcoin and similar crypto platforms because, unlike those, the digital yuan has direct backing from China's central bank.

Most of the people on planet earth are working-class consumers — not capitalists. If individuals don't own capital with which to exchange value with others, they need a reliable vehicle — a proxy — with which to do so.

Bitcoin's anything-but-stable performance may not be inspiring confidence that it can play that role as well as fiat currencies, given El Salvador's experience and the list of countries pursuing central bank digital currencies (CBDC) instead of legally recognizing existing forms of crypto as money.

What will the future of crypto look like for average, working-class consumers?

According to the International Monetary Fund, government-backed cryptocurrencies could provide "more resilience, more safety, greater availability, and lower costs" than the equivalent privately controlled digital currencies like Bitcoin.

The IMF emphasizes that "prudent design" is necessary, but that the potential is there to improve upon the currently "inherently volatile" nature of crypto in general.

It’s important to remember that inflation is currently a global phenomenon as well. Nations typically raise interest rates to combat inflation, which means, again, that the current unregulated approach to crypto may not fare any better amid spiraling inflation than a conventional fiat currency. A central bank digital currency may not have that weakness, but that’s far from proven at this time.

If there's one clear prediction to draw from this, it's that digital currencies are here to stay, in one form or another, although perhaps not uniformly across the globe. Some countries have enacted limited or total bans while others are quickly working to deploy their own central bank digital currencies. For the foreseeable future, buying and selling goods and services across borders will still require a sophisticated currency-exchange system.

It's also difficult to see how a single global digital currency — which some fringe conspiracy groups claim is the endgame of crypto — can emerge from this contradictory patchwork of nations asserting their local preferences.

One way or another, the future of cryptocurrency will prove interesting. Some evidence points to central bank digital currencies bringing stability to a system that is inherently unreliable and unsafe for consumers due to its lack of publicly accountable governance. Bitcoin and its competitors don't currently offer that kind of peace of mind, and the one country to recognize them as legitimate currencies has not yet convinced the world otherwise.