MORGAN STANLEY: Cryptocurrencies aren’t going to be ‘fully disruptive’

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If you think the crypto-revolution is coming, prepare to be (somewhat) disappointed.

Morgan Stanley’s US equity analysts argue that digital coins such as Bitcoin and Ethereum are unlikely to replace traditional fiat currencies.

“We think that cryptocurrencies as a group are likely to see some adoption outside of the incumbent financial system, but we do not expect them to be fully disruptive,” the MS team said.

Here’s Morgan Stanley’s disruption spectrum, also known as the “Fintech Gauntlet chart”:


The chart suggests that most of the headwinds for digital currencies will come from regulatory restrictions.

While the digital infrastructure is in place for cryptocurrencies to grow, some level of market regulation will still be required in order for digital currencies to build and maintain user trust and become entrenched in the financial system.

The analysts also considered whether cryptocurrencies were more like stores of value rather than a means of exchange.

“With high volatility, low acceptance, relatively slow transaction times, and negligible fraud/transaction validity advantages (at least for now), Bitcoin (and all cryptocurrencies) are functioning more like assets than true currencies or transaction mechanisms,” they said.

They also noted that while the blockchain technology that Bitcoin operates on is lauded for its accurate recording of transactions, current transaction providers are competitive on security.

Instances of fraud on credit cards and debit cards is low (in 2014 it was fractional – 0.057%), and the Bitcoin network has still shown itself to be susceptible to hacking.

“A core tenet of the Bitcoin value proposition is that the blockchain assures transaction validity,” the analysts said.

However, in that context one could argue that Bitcoin has been overrated.

Support for Bitcoin is based in part on the view that less than 2% of transactions on the blockchain have been subject to fraud — “an assumption that is off by a factor of almost 40”, Morgan Stanley says.

In addition, the incumbent networks used to facilitiate transactions don’t require nearly as much electricity to use.

Each Bitcoin is digitally “mined” by computing systems, which unlock new Bitcoins by solving complex mathematical problems.

With a finite total of 21 million Bitcoins and around 16 million already in circulation, the race is on to secure the remaining coins.

In the early days of the cryptocurrency, Bitcoins could be mined on a home computer. But as the supply of new Bitcoins decreased, the complexity increased.

Now entire mainframe networks are set up with the express purpose of mining new coins.

And they use some power — more than enough to power 1 million homes according to Morgan Stanley:


All of the above factors will be interesting to consider as the market for cryptocurrencies mature.

And in particular, whether cryptocurrencies will make the switch from alternative assets to a fully liquid means of exchange and how the regulatory framework around that will develop.