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Cryptocurrencies are a $1.4 trillion market and have recently witnessed increased attention from investors and corporates. Furthermore, with the growth of decentralised platforms and applications, they are due to become increasingly mainstream. Can one afford to ignore them now?
Let’s start with some numbers. As of 12th February 2021, the total market cap of 8,436 cryptocurrencies was $1.4 trillion with $212bn traded in the last 24 hours. Bitcoin rules the roost with its $881 billion market cap, making up 61% of the total cryptocurrency market. Other currencies featuring in the top 10 list (by market cap) include Ethereum, Tether, Ripple, Polkadot and Chainlink among others. The use cases of each of these currencies vary across the board. E.g. Bitcoin is seen as a store of value due to its limited supply (capped at 21 million coins). Ethereum is a blockchain network on which developers can build decentralised apps. Dogecoin, another cryptocurrency which has recently been hovering around the top 10 list, started as a joke and was inspired by a Shiba Inu Doge meme. The currency was created to build a fast, quick and low-cost payment system.
Cryptocurrencies are a fairly new asset considering that Bitcoin, the first cryptocurrency, was born only in 2009. For most of this 11+ year journey, cryptocurrencies have been hanging around in the fringes of the financial ecosystem and have been characterised by high volatility, regulatory hurdles, scams and much more. While many of these characteristics are still relevant, they are increasingly being ironed out. The cryptocurrency ecosystem of today looks very different from what it was even 2-3 years ago. Below are some of the developments of the past few months that, in my opinion, have solidified their place in our lives going forward.
First, in 2020, low-interest-rate environment (central banks like the Bank of England mulling over zero or negative interest rates) coupled with a ‘risk-on’ sentiment in the market shed light on ‘risker’ but potentially higher-yielding assets like cryptocurrencies.
Furthermore, large stimulus initiatives across the developed world (which have led to an average debt to GDP ratio of 125% among the advanced economies), have exposed fiat currencies to long term inflation risk and eventual devaluation.
It is worth recalling that Bitcoin was born out of growing anxiety over fiat currencies when the money printing machines came out in the 2008 financial crisis. A repeat of these quantitative easing efforts at a much higher scale compared to 2008 have led to the increase in popularity of Bitcoin as an inflation hedge and a store of value.
A press article aptly highlights that “Bitcoin’s limited supply stands in stark contrast to central bank monetary policy.” 2020 saw the value of 1 Bitcoin (BTC) rise from c.$8,000 at the beginning of the year (falling to $5,000 in March 2020) to c.$32,000 by the end of 2020 and $c.47,000 as of 12th February 2021.
Second, cryptocurrencies have recently benefitted from aggressive corporate buying activity. Reports suggest that both PayPal and Square have been buying more than 100% of the newly mined Bitcoins in the market.
In October 2020, PayPal also allowed its US-based customers to buy and sell Bitcoin via its digital wallet, a service that Square has been providing since 2018 via its Cash App. However, things started to change at the start of this week (w/c 8th February 2021) when Electric Vehicle manufacturer Tesla announced in a recent SEC (Securities and Exchange Commission) filing that it had invested $1.5bn in Bitcoin from its balance sheet.
In the filing, the company also added that it expects “to begin accepting bitcoin as a form of payment for our products in the near future”.
Bitcoin’s price rallied by 22% in a day from c.$39,400 to highs of around $48,100 on the back of this news. Tesla’s surprise announcement has led to speculations of more corporates following suit. However, some money managers and academics quoted in a recent Financial Times article have expressed their concerns. Their scepticism stems from the rationale that price volatility in the crypto asset could potentially impair profitability for a company that has only recently started reporting profitable quarters.
Furthermore, given Tesla’s heavy (2%) weighting in US benchmark index, any volatility in Tesla’s share price would also have wider repercussions.
In a recent interview, Uber CEO Dara Khosrowshahi dismissed the idea of using its cash to invest in cryptocurrencies but was open to considering it as a payment method. BNY Mellon, the US-based bank with $2 trillion under management, announced on 11th February, its plans to hold Bitcoin and other cryptocurrencies for its clients.
Separately, Mastercard announced on 10th February that it will begin allowing cardholders to transact in certain cryptocurrencies. Other cryptocurrencies with corporate support included Chainlink which now counts Deutsche Telekom as one of the largest data providers to its network.
It is thus safe to say that cryptocurrencies are a much more serious asset today than they were a couple of years ago. In addition to the macro factors and corporate buying, increased celebrity and influencer attention on certain crypto assets (e.g. Elon Musk, Snoop Dogg, Kevin Jonas have recently tweeted about Dogecoin) is also bringing them to mainstream conversations. However, their journey to being in conventional investment portfolios, as transaction currencies is not without its hurdles.
In December 2020, the SEC filed an action against Ripple Labs (developer of the Ripple cryptocurrency) and 2 executives “alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.”. In India, recent reports suggest that “well-heeled Indians” are feeling jittery about the future of their now sizable cryptocurrency investments on international platforms as the Indian government mulls banning Bitcoin.