Crypto markets fell along with the general economy, a new alignment for new technologies. Miami Herbert Business School faculty members expect it to rebound stronger than ever, in part due to its inherent stability from risk aversion.
While some refer to a devastating cryptocurrency crash and an industry in freefall, business tech thought leaders at the University of Miami classify the current upheaval as a turmoil, a scenario to be expected for a tech new and evolving that will ultimately cleanse and empower the industry.
“This upheaval indicates that we can now see that certain business models and projects funded by certain companies are not working, and that is good for crypto – and in the long term, a significant cleaning up of the industry,” said Ola Henfridsson. , Schein Family Endowed Chair and Professor of Business Technology at University of Miami Patti and Allan Herbert Business School.
He noted the general tendency of people to overestimate what technology can do in the short term and underestimate what it can do in the long term.
“That’s definitely the case here,” Henfridsson added. “Because this is new technology, many new business models have not been tested.”
The same factors behind the global slowdown—inflation, rising interest rates, war in Ukraine and global uncertainty—caused the crypto slowdown. Some media reports even report a perfect storm that caused the crypto slide. During the pandemic, people with extra funds flocked to virtual currencies, big banks and hedge funds invested, and now both have pulled out.
Robert Gregory, an associate professor at the business school, noted that one of the biggest takeaways and insights from 2022 is how crypto markets have aligned with the general macro environment.
“These ups and downs are completely normal, but one thing that is new and that we have become aware of is the strong correlation between the crypto markets and the broader markets, perhaps a sign that there is a very important involvement of institutional actors which was not the case five years ago”, he declared.
Henfridsson identified some of the many stakeholders that make up the “crypto space”—custodians, exchanges, traders that include hedge funds, among others— and said the industry’s potential commercial or case uses are so vast that it’s difficult to talk about the industry as a cohesive whole. He highlighted the role played by custodians, a third party responsible for storing and safeguarding currency.
“If crypto is going to become a widely adopted technology or currency in society, we need custodial solutions. And these custodians need to be regulated the same as banks,” Henfridsson said. “Some more conservative currencies, like Coinbase, have collaborations with banks.”
For Henfridsson, one of the advantages of cryptocurrency is its high security and its ability to resist tampering.
“No one can take your bitcoin, no one can take your wealth, and it’s very valuable. But that also means you need to have custodial solutions that make it easy for people to hold assets, because otherwise you need to know the cryptography. [for self-custody],” he said.
Although decentralized in nature and design, the crypto industry is looking to a centralized government or international body to provide the regulatory framework that will protect investors, according to the two experts.
“This new technology has come up against a regulatory vacuum—regulators don’t know how to categorize it and it creates a lot of confusion because you can’t apply old ways of thinking and standards to new technology,” Gregory said. He pointed out that, in the same way that the US telecommunications policies of the 1990s paved the way for companies to take advantage of the new emerging Internet platforms of that era, US regulators will play an immense role in the future of industry.
Gregory noted that while the internet has evolved to become controlled by a few mega-corporations, the current crypto phase is in part an attempt to return to a collective vision that eliminates middlemen to provide a fairer distribution of wealth.
He distinguished between original mission crypto believers and short-term speculators looking to make money off the platform’s volatility and compared the current crypto stage to the Renaissance of the 14e-17e century, a time when the advent of the printing press and the concept of double-entry 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 de-globalising—global economies are under threat due to security concerns 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 be only a handful of currencies that can survive this development, Henfridsson suggested. And while the U.S. dollar has long been the world’s standard currency, China’s rise and Russia’s recent isolation by sanctions over its invasion of Ukraine have prompted both countries to seek to develop their own monetary systems, he said.
Bitcoin, because it is country and politically neutral, could well become a strong player in the global economy, said the specialist.
“There is no one supporting bitcoin, not Russia, not China, not the United States, which makes it a very good alternative for smaller countries to adopt something that is legal tender,” said explained Henfridsson. “It’s something powerful. Over the next 10 years we will see more digital currencies in general, and then it will be more about how traditional institutions like central banks and the International Monetary Fund will shape this new technology.
Gregory suggested that the next 12 to 18 months will bring clarity to the industry in terms of the US regulatory framework.
And Henfridsson predicts a “big, big bull market” when this regulation happens.
“Many investors have waited on the sidelines as the crypto space has been unregulated,” he said. “Once it becomes legit from their perspective, it will be huge for the whole space.”