When Satoshi Nakamoto mined the first bitcoin in 2009, he introduced kudzu to the garden of the global economy.
Now, there are over 5,000 cryptocurrencies available on dozens of global exchanges, much to the chagrin of the global banks and governments trying to control them. The value of a bitcoin has exploded from $0.0008 to a peak of nearly $64,000, and many “altcoins” have followed suit. The blockchain itself has grown so comically large it consumes more energy than Sweden.
All of this madness begs a simple question: where is crypto going?
In this piece, I’ll explore where crypto has been, what precipitated the booms, and finally, three possible scenarios for where it’s going, backed by trends and data.
The only unquestionable certainty about crypto’s future is this: it’s going to be wild.
Where it’s going: three possible scenarios
What is the future of crypto? Will cryptos explode and meet investors’ highest expectations? Will it crash and burn, earning a place next to the Tech Bubble Burst in econ textbooks? Or will it flatten out somewhere in the middle, finally calming down after a volatile run?
Let’s explore all three scenarios, and why all three have a chance.
To the moon: why crypto could keep going up
Cryptocurrencies, especially Bitcoin, could very well keep rising in value and become the dominant global exchange medium before governments can reel them in. Here are three reasons why:
Emerging markets are getting in on the action
Given its recent IPO, a lot of focus has been placed on Coinbase lately. To its credit, the focus is totally warranted – for a cryptocurrency exchange to be “knighted” with an IPO is a massive deal (and a big win for the crypto community).
But there’s an even bigger story happening over at Luno, a crypto exchange catering to emerging markets. Crypto investments from Africa and South America are at their all-time highest volume, and analysts say it’s for two big reasons.
The first is obvious: crypto offers a way to multiply money where others don’t exist. Traders in Guatemala or Mozambique may lack the access, education, or simply the opportunities to invest in stocks or real estate. Crypto offers a way to protect their savings from inflation and corruption, requiring little investing knowledge.
Second, crypto offers a way for migrant workers to transfer money back home without remittance. According to a report by World Bank, ex-pats sent $48 billion back to sub-Saharan African in 2019 alone, and were subject to a 9% remittance fee on average. That’s over $4 billion in fees squeezed out of a population already living away from their families on an extremely strict budget. Barring widespread regulation, the trend of migrants switching to crypto is likely to continue, driving prices higher and fulfilling the initial purpose of cryptocurrency – as a decentralized way to move and exchange value without third-party interference (or fees).
Institutional acceptance is rising
Since 2011, the crypto community has fought a decade-long battle for acceptance as both a currency and as an investment. Their efforts to be recognized as a currency were met with critical victories early on – Expedia, Microsoft, even PayPal began accepting Bitcoin as payment before the boom of 2017.
But despite soaring values, Bitcoin and other cryptos struggled to be accepted as an investment until very recently. Outside of retail traders and Elon Musk, big banks and investment firms showed little interest. Given crypto’s volatility, it was hard to blame them. Many, in fact, felt compelled to shield their clients’ money from crypto, banning employees from investing.
That’s why when Morgan Stanley became the first big bank to allow crypto into client portfolios, it was a pretty big deal. The endorsement basically said, “we know the risks, but the upside is too good to ignore.”
Granted, clients need an “aggressive risk profile” and $2 million in assets to qualify for crypto holdings, but massive earnings could lead to a domino effect with other firms, driving crypto values higher.
Blockchain has demonstrated resilience and maturity
Dollars wouldn’t exist without banks, and Bitcoin wouldn’t exist without the blockchain.
Blockchain was designed to replace the third parties like banks or PayPal that currently have to lord over every single online transaction. Think about it; you cannot exchange value with another person online without a bank or other financial institution involved. And even if that third party doesn’t charge a fee, they can inject outside influence and/or slow the whole process down. Worst of all, having thousands of online banks each with its own ledger means payment tracing is nearly impossible.
The blockchain was meant to solve all of these problems – a safer and faster system free of corruption. Nakamoto even built in anti-theft measures: if you can muster enough computing power to steal Bitcoin, why not mine it (which also controls inflation)?
So far, Nakamoto’s genius design has paid off. Bitcoin works. Blockchain works. Sure, the pair may suck up a ton of power, but the system works. Based on Nakamoto’s original tech, cryptos are scaling – aside from power consumption, there’s no major tech holding them back. Exchanges have been hacked, but many point to the failings in their own security software – not a failure of the blockchain.
In short, the fact that blockchain has proof-of-concept may be enough to shoot bitcoins to the moon, and some altcoins with it.
Stuck in cryo: why crypto could flatten
Evangelists are saying this is just the calm before the storm as Bitcoin continues to fluctuate. Others are saying the pandemic bubble has already burst.
There’s a smaller, yet still credible voice right in the middle that says Bitcoin and altcoins may defy the odds and actually taper off – at least temporarily.
Here are three factors that may not end the party, per se, but they’re definitely turning down the bass.
Regulation and taxation are coming
Some crypto investors still believe that Bitcoin is a tax haven. The IRS doesn’t see it this way.
The IRS officially labeled crypto as a taxable asset in 2014, but nobody cared. Out of millions of crypto traders, only a few hundred listed actual gains on their taxes, so the IRS got understandably pissed. In 2017 they successfully subpoenaed Coinbase for the records of 10,000 traders who’d dodged taxes, and sent all 10,000 a nastygram stating “pay up or lawyer up.”
They did it again in 2020, only this time, nobody quite knows how they built the new list of offenders. The most popular theory is that the IRS has leveraged blockchain tech to trace payments, which is easier than it sounds given that the blockchain is a giant ledger.
But even though crypto taxes are steep, hard to pay, and now totally unavoidable in this country, at least we’re allowed to trade crypto. In Japan and China, it’s deeply regulated, and therefore the governments could shut them down at any time.
Here’s a list of countries that have banned or nearly banned crypto:
- Bangladesh has labeled crypto trading as a “punishable offense” and has jailed investors.
- Bolivia has officially prohibited crypto trading, fearing its potential for fraud and embezzlement.
- China has effectively banned crypto – mining, trading, and use as a currency are illegal.
- Ecuador allows trading but has banned crypto as a form of currency.
- India has expressed plans to criminalize all crypto activity in 2021.
- Iran has banned all crypto activity, fearing its use for discretely funding terrorism
- Nepal has also banned all crypto activity and even made a dozen related arrests.
- Thailand has ordered all banks to stay away from crypto, although they’ve hinted that they’ll legalize crypto if/when the government can build a regulatory framework around it.
We’ve already seen how impending regulation can directly impact prices. When rumors circulated that South Korea might ban crypto, Bitcoin values dropped 12.7% overnight. Even though they didn’t, the measurable impact was real.
But like the value of crypto itself, the list of countries that do and don’t accept it changes all the time. The Russian Federation, for example, banned crypto right up until January 2021 when they figured out how to regulate and tax it.
Impending regulation isn’t an automatic death sentence for crypto (unless you’re in Delhi) but it definitely puts a cap on the excitement. The incoming tidal wave of taxation and regulation, therefore, is surely enough to temper demand and flatten prices.
Crypto is still too volatile for traditional investors
To build on my earlier point, have you ever wondered how your retirement account always seems to produce 7% to 10% returns each year? If the stock market is volatile by nature, how can any investment in stocks provide consistent returns year after year?
The reason is that whoever built your retirement portfolio did so using an asymmetric risk profile. Asymmetric risk simply means that the odds are in your favor. Whoever handles your money isn’t simply gambling it away; they’ve built an extremely diverse and safe portfolio of Blue Chips, industry ETFs, and other conservative investments that consistently provide annual returns. Asymmetric risk keeps risk potential gains low, but the risk even lower.
Blue Chips and ETFs are the building blocks of an asymmetric risk portfolio because they’re reliable and predictable. There are so many factors driving share prices that they fit nicely into algorithms used to essentially predict the future.
Traditional investors shy away from cryptocurrencies because their behavior is too unpredictable. Analysts can confidently predict where AMZN and AAPL share prices will be in 2025 – but Bitcoin could be $10 or $400,000.
Morgan Stanley allowing crypto into client portfolios is a win for Bitcoin, sure, but it’s hardly created a domino effect. Plus, most folks who understand the value of compound investing simply aren’t interested in crypto. Traditional investing using asymmetric risk tools may not make you a millionaire overnight, but it will – and it’s magnitudes safer, too.
“Our most successful clients aren’t even asking us about crypto,” says David.
The volatility of crypto values is undermining its original purpose
Satoshi Nakamoto never intended Bitcoin to be an investment. Rather, a bitcoin was essentially supposed to serve as a casino chip for the Internet: a direct reflection of outside value, faster and easier to exchange than cash.
However, Nakamoto never explicitly announced what the value of a bitcoin should be (i.e. one bitcoin will always equal the value of $1 USD in 2009). Therefore, the value of a bitcoin became entirely dictated by supply and demand. Demand soon outpaced supply, so the value rose from $0.0008 to $64,000.
Ironically, Bitcoin becoming an investment undermines its original intended purpose. Casino chips always represent $5 or $50 or $1,000. Even as inflation occurs, the chips never have to change.
That’s the way Bitcoin should have operated.
But as an investment whose value fluctuates every second, Bitcoin became much harder to accept as a currency. Any merchant accepting crypto as “currency” is taking on a huge risk. In part, that’s why many countries have banned crypto as a currency entirely – at least until they can understand and regulate it.
So while the blockchain works, the fundamental purpose of Bitcoin as an online casino chip doesn’t. As long as Bitcoin lives as a volatile investment with no persistent real-world value, the pool of banks and companies accepting them will remain small.
There are more reasons why cryptocurrencies could level off, indirectly or even directly through government regulation. You could even argue that the three factors listed here could drive the price up or down, depending on how they impact demand; increased regs and taxation could actually fuel interest from traditional investors waiting for the federal go-ahead.
So what factors are much more likely to kill the party and push crypto down?
Failure to launch: why crypto could fail
Here are three factors that cause even the most die-hard crypto evangelist to lose sleep at night.
Government-controlled cryptos are coming
When governments tell banks to “hold off” on crypto, it usually means one of three things:
- They’re about to ban it.
- They’re trying to figure out how to regulate and tax it.
- They’re developing a replacement.
In China’s case, it was definitely number three. The People’s Republic launched trials of its first official cryptocurrency in April 2020, and a year later the “digital yuan” continues to thrive.
By design, the digital yuan is a lot like Bitcoin. China’s first crypto can:
- It easily crosses borders.
- Transactions can be tracked and traced through a singular ledger.
- It’s built upon tech similar to blockchain.
But naturally, the digital yuan is different from Bitcoin in a few key ways important to the Chinese government:
- It’s controlled by the Central Bank of China.
- It’s not an investment – its value is heavily regulated.
- It’s already widely accepted (by law).
India will almost surely follow suit. The signs are there; the country of 1.4 billion demonetized cash in 2016 and has plans to ban crypto outright. A government-controlled crypto is likely on the way.
Some say that government cryptos aren’t direct competitors to Bitcoin and altcoins, since they’re neither decentralized nor capital assets. But as soon as governments see crypto as a threat to their own currency’s valuation, they’ll surely push it out. For example, a loss in remittance for sub-Saharan African banks has surely been noticed, so it’s possible a Bitcoin ban will come in that region soon as well.
It’s also likely that global merchants will find more comfort in state-controlled currencies as a form of payment since they’ll likely be insured. This may undermine what little ground crypto has gained as a global currency, weakening its value as an investment as well.
But as the world moves towards greener technology, another drawback of Bitcoin rears its ugly head.
The blockchain may be unsustainable
While the concept of blockchain has proven itself, some say its rickety, homemade infrastructure could collapse.
First, in a world trying to go green, Bitcoin is sucking up too much power. One of the blockchain’s natural defenses is that it takes a tremendous amount of computing power to maintain, and thus an even greater amount of power to hack. “Defeating” the blockchain would be like catching up to a particle in the large hadron collider; it’s simply moving too quickly to catch.
Impressively, Nakamoto actually accounted for the blockchain’s rising hunger for processing power in his original 2008 whitepaper, even factoring in Moore’s Law. What he didn’t account for was energy consumption.
In 2017, maintaining the Bitcoin blockchain took up 6.6 terawatt-hours of power. In October 2020 it was 66.7 TWh, and mere months later, it rose to 121 TWh. If Bitcoin were a country it would already be the 30th most power-consuming country on earth.
The blockchain’s second-biggest problem is its location. Yes, it has miners and maintainers across the world, but currently, currently 65% of them are in China, where the government is actively shutting down mines.
But even if the Chinese government is unable to shut down its citizens’ Bitcoin mines fast enough to affect the health of the blockchain, many investors still see a more immediate domestic threat.
The Bitcoin bubble could burst (again)
If you read the section down below on Bitcoin’s history, you’ll know that Bitcoin suffered its first “bubble pop” from 2017 to 2020. Among other reasons, too many new investors bought in during a holiday 2017 frenzy, then pulled out in early 2018 when they got cold feet. This led to a drop in value, shattering new investors’ beliefs in a bulletproof investment, so even more pulled out until Bitcoin had lost 81% of its value.
This time, the buying frenzy by new investors has happened on a more biblical scale. According to a study by The Harris Poll American, roughly 7% of Americans receiving stimulus payments invested some or all of it into cryptocurrencies, mostly Bitcoin and Ethereum. Remember, crypto’s valuation is mostly based on demand alone, and demand surged during the pandemic.
But how long will that surge in demand last? Given how Bitcoin has already lost 24% of its value in nine days, it’s possible that the frenzy is already over.
Sure, it could rebound as buyers scoop up sub-$50k coins, and even go as high as $100,000 this summer. But rest assured, a “Bitcoin winter” is coming, Bobby Lee, former CEO of crypto exchange BTCC told CNBC. Prices have fallen 90% in months, and there’s no reason at all it couldn’t happen again.
Where it’s been: a quick history of cryptocurrencies
1983 – 2008: early exploration
Cryptographers and programmers have been exploring the idea of digital currency since Star Wars: Return of the Jedi was in theaters.
In 1983, American cryptographer David Chuam conceived of an untraceable virtual currency called “ecash,” later called “Digicash.”
In 1998, 10 years before Satoshi Nakamoto published his white paper on Bitcoin, a Chinese computer scientist called Wei Dai published “b-money, an anonymous, distributed electronic cash system.” In it, he outlined the basic principles that most cryptocurrencies use today – his early influence on crypto was so profound that the creators of Ethereum based their unit of measurement after him: the “wei.”
As early pioneers like Chaum and Wei set the groundwork for a virtual currency, Satoshi Nakamoto gave the concept wings in 2008.
2009: Satoshi Nakamoto launches Bitcoin
Bitcoin’s official birthday was January 3rd, 2009. That’s when the mysterious Satoshi Nakamoto used Bitcoin software v0.1 to generate the first “block” (aka the genesis block) and mine the first “coin.”
To commemorate the moment and to make a dig at traditional banks, Nakamoto included the day’s headline in his compiled code file:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
Nakamoto continued developing both Bitcoin and the blockchain with a team of skilled developers until mid-2010 when he handed off the project to Gavin Andresen and simply vanished. But even by then, Bitcoin and the blockchain were fully functional. Nakamoto’s proof-of-concept was live and running, and other devs started to take notice.
2011-2015: the altcoins arrive
Bitcoin served as a proof-of-concept for cryptocurrencies, so alternatives quickly followed suit. Any alternative crypto to Bitcoin was given the moniker “altcoin.”
In 2011 Charlie Lee founded Litecoin, which used alternative cryptography algorithms to accelerate coin production and transaction speeds over Bitcoin. Namecoin arrived the same year, created by Vincent Durham as a way to help users encrypt their identities, thus protecting online free speech.
In 2013 Billy Markus and Jackson Palmer launched Dogecoin more or less for fun and to ease a new group of investors into the crypto community without the controversy surrounding other cryptos. Their “meme crypto” paid off (literally), since DOGE has risen from $0.00026 to a peak of $0.45 in 2021.
Finally, the last altcoin worth mentioning is Ethereum, which launched in 2015 and has become the second most popular crypto (and second-largest by market cap) behind Bitcoin. The chief difference is that Ethereum allows users to exchange value and information like computer code, whereas BTC is primarily used for value exchanges only.
In total, over 5,000 altcoins have flooded the market since 2011 – but despite the overwhelming quantity, nobody has topped bitcoin for market cap or popularity.
As a result…
2016-2020: Bitcoin’s first bubble bursts
In five years, the value of Bitcoin has gone from $1,000 to $60,000. To compare that to another type of investment, that’s like buying a $200,000 condo in 2016 and having it rise to a value of $12 million today.
The value of a bitcoin has grown faster than traditional investments and even competing cryptocurrencies entirely because of increased demand. Nakamoto did not conceive of Bitcoin as an investment, but simply a more efficient currency. However, a limited supply of new coins plus explosive demand equals skyrocketing prices.
From 2017 to 2020 the value of a bitcoin looked like the EKG of a scared chihuahua, with massive peaks and valleys fluctuating between $7,000 and $12,000. Oftentimes, the price would plummet overnight, causing panic. The buying frenzy during the 2017 holiday season led to Bitcoin’s first bubble burst, with prices that wouldn’t recover to pre-2018 levels until late 2020.
2020-today: Bitcoin explodes
But then, in November 2020, the value of a single BTC started rising and wouldn’t stop until it hit $64,000. Experts say factors like mainstream acceptance, stimulus checks, and fear of inflation drove a fresh wave of new investors.
Altcoins thrived during the Q4 surge as well, with Ethereum, XRP, and Bitcoin Cash doubling in value (among many others).
That being said, nobody is 100% confident.
Why the future of crypto is so hard to predict
Cryptocurrency isn’t like other investable assets like stocks or real estate. Not only have those forms of investing simply been around longer, but their future behavior is also much easier to predict.
We have a much better idea of what an upstate New York home or a Blue Chip stock will be worth in 2025 because their respective values are rooted in predictable factors.
Here are some researchable factors that can drive a stock’s value:
- The global economy.
- The domestic economy.
- Earnings reports.
- Impending patent approval.
- Management shake-ups.
- Mergers and acquisitions.
- Investor sentiment.
And more. For real estate, those factors may include:
- Interest rates.
- Inventory availability.
- Shifting demographics.
- Demand by certain generations.
- The overall markets.
- Tax rates.
- The availability of government subsidies.
For someone trying to predict the future value of a house or a stock, there’s a lot of meat to chew on here. There’s also a lot of hard data for a hedge fund or wealth management firm to plug into an algorithm and see their specific percentage chances of pulling off a win.
In a way, traditional investing is like poker, and you can totally learn to “count cards” to put the odds in your favor. That’s why retirement accounts almost always earn 7-10% ROI each year.
By comparison, the value of a bitcoin is based on factors that are both fewer and harder to predict and build models around. Compared to the dozens, if not hundreds of factors driving real estate and share prices, the value of a BTC, ETH, XRP, or other crypto is primarily based on three things:
- Demand. Is the demand for more of this cryptocurrency outpacing the supply generated through mining?
- Safety. How safe are investors’ holdings from hackers or mismanagement?
- Regulation. How has their government responded to crypto trading? Will it be subject to a high capital gains tax rate (USA), heavily controlled (China), or outright banned as criminal activity (India and Bolivia)?
None of these factors is easy to predict, and the latter two only pull the value of crypto down. That means the only factor pushing the value of a crypto up is demand.
Demand is a fickle mistress – volatile, hard to predict, and driven by human nature. A perfect illustration of this is the growing list of failed tech IPOs, including Uber, Lyft, Zynga, Facebook, and more recently, Coinbase. All five overestimated their demand and thus became an expensive disappointment for early investors.
Bobby Axelrod, the fictional hedge fund CEO from Showtime’s Billions, once used an analogy to describe the Chinese market that I think applies well to crypto:
“[It’s] a pig on LSD. You’re never sure which way it’s going to run.”
It’s difficult to say what the future holds for crypto. The scant few factors guiding its future are themselves hard to predict, so pretty much all theories have merit.
Crypto could flourish given the increased interest from emerging markets, the proven concept of blockchain technology, and slow but steady institutional acceptance.
Crypto could stagnate due to increased regulation and taxation, tepid investor interest, and its confusing dual existence as both a currency and a high-risk investment.
Crypto could crash due to the emergence of state-controlled copycats, an unsustainable blockchain, and a “Bitcoin winter” that it never recovers from.