Crypto-Outlook: 3 Key-Factors to Keep an Eye on in 2018!

The outgoing year has been a wild one for cryptocurrencies. On January 1st Bitcoin was just under $1'000 and has tested the 20k mark just in time before Christmas, and then took a huge dive again. Altcoins alike have experienced blasting roller-coaster rides all the more and authorities still don’t quite know what to do with crypto. So what’s in it for 2018 after all? In the following we’ll take a look at three key factors to keep an eye on next year:

Regulation

Over the course of 2017, we’ve seen a massive trench open up between the classic financial industry and crypto projects. In today’s world where we are slowly transitioning to the internet of value and are more prone to (over)regulation than ever, both sides started to build their businesses around underlying governing systems. In crypto, this was so far fairly easy. Being still a hugely unregulated market, basically, the only authority to comply with was the technology itself — the rules and frameworks governing the blockchain.

Banks, however, are under constant surveillance by financial market authorities and are growing their compliance departments with massive efforts in order to fulfill regulatory demands. Seeing how ICO’s can generate millions in just days, the banking industry felt left out and now legitimately asks where differences remain between these crypto projects and classic financial intermediaries which have to live up to higher standards. In essence, there are two simple solutions to this problem: Either banking gets deregulated, or cryptos get regulated. Which one of those is the more likely scenario is crystal clear and thus financial market regulators all over the globe have found an interest in creating frameworks for the crypto market or at least try to find ways to apply pre-existing frameworks.

Thus I expect 2018 to be the year where regulatory efforts in crypto literally explode. Whether this is a good thing remains unclear since regulators across the world will have different expectations. This will eventually lead to a multitude of national frameworks that handle cryptocurrencies very different from one another. Keep in mind, cryptocurrencies are meant to be decentralized networks that function across the globe. This could lead to many conflicts in law, as standards governing the application of the correct law would have to be established first. Moreover, this will lead to regulatory hotspots in areas where governments are crypto-friendly. To some extent, this is already starting to happen, as countries like Switzerland or Singapore have moved to the very top of this list already. We’re basically running into the same issue as with the internet in general, where every country is trying to regulate its piece of the cake while undermining the importance of a global framework.

ICO’s

Going hand in hand with regulation, we have to look at ICO’s. The ICO market was also exploding in the outgoing year, but you probably know that already. However, as pictures say more than a thousand words, you might want to take a look at the graph in this video, showing just how much ICO’s exploded. So, where does that leave ICO’s for 2018? Regulators will most likely not only put their foot down on setting up new laws but also they will surely increase controlling and surveillance staff and try to take down all fraudulent, non-compliant and otherwise badly executed ICO’s. If this happens, we will see a huge correction in the number of new ICO’s launched. However, this will help investors, as legitimacy among the projects is set to improve as well. We could call it an era of ICO 2.0, as ICO’s will probably be adjusted to match the regulatory requirements of IPO’s. This could involve extensive duties for the provider, such as proper financial documentation requirements and the need for securities registration.

Also, there is a recognizable trend towards ICO’s that offer more utility than in the past. The times in which just about any idea could raise millions through a simple ICO and not even have a viable solution ready — let alone a working MVP — will probably become a thing of the past in 2018. Having a product ready at hand and an actual solution to a real-life problem will make the difference not only for ICO’s but also for all the existing currencies and assets trying to catch up.

3rd Gen Cryptos

The third thing to keep in mind for 2018 is so-called third gen cryptos. In case you missed out on this definition, here’s a quick run-up: Bitcoin is considered a 1st gen crypto, as it provided a basic blockchain based P2P network for a secure exchange of value. However, as Bitcoin is showing day in and day out, a 1st gen crypto easily reaches its limits, since scaling and growth of the network are not that easy. A 2nd gen crypto is basically what Ethereum did subsequently. Ethereum took the Bitcoin concept and introduced a programming language on top of the network in order to create things like smart-contracts or apps on top of it, thereby massively increasing the utility. However, as the game CryptoKitties (which is built on Ethereum code) just recently showed, scalability issues still haven’t been solved properly.

Now the 3rd gen is something not quite so clear yet, however, projects like Cardano have risen, claiming to be the first 3rd gen crypto. The issue they’re trying to tackle lies within governance. 1st and 2nd gen cryptos are really poorly designed when it comes to governance in general. Charles Hoskinson, of Cardano, goes into more detail by explaining what a 3rd gen crypto needs to solve. Accordingly, governance involves three key aspects: scaling, interoperability, and sustainability. In short, cryptocurrencies need to figure out ways to scale in a fast and efficient way, they need to work with other currencies, assets or systems and they have to find ways to continuously fund their efforts. Seeing how Cardano is taking a lead role in the development and execution of such a 3rd gen network, this leads me to the conclusion that others will follow, as these are the most pressing issues right now.

In Summary

2018 will probably see the beginning of a larger consolidation phase, where the crypto-space will evolve and get down to real business. This could massively strengthen existing players that make it through this phase and due to a coming wave of regulatory efforts legitimize the industry as a whole. The rise of blockchain governance could further improve cryptocurrencies in general and hopefully, provide more respect, acceptance, and legitimacy for cryptos in order to show the full potential.

Feel free to connect with me via LinkedIn or comment to share your own thoughts. I’m always interested in different views on the topic, as I progress in my research in FinTech, LegalTech, Compliance, Data-Protection and Competitive Strategy in order to create a better tomorrow!