The Crypto Conundrum
2021 has been a wild ride for the cryptocurrency market. Bitcoin, the project that created the industry over a decade ago, surged to an all time high of $64,829.14 before dropping to $28,818 today according to Coindesk.com. Alt coins like Ethereum, Cardano and Litecoin have all experienced triple digit returns for the first half of the year. Ripple has come under investigation by the SEC and "meme" coin Dogecoin has caught the internet's imagination to transition from a joke to a market cap of $22.5B. Whether you have been tracking Bitcoin when it was available for $10 ( and kick yourself for not listening to that friend) or jumped in at the height of the market, no one can call the crypto market boring.
However, with all the noise around the market, have we lost sight of why cryptocurrency was created? Are they for investment, next-gen digital payments or both? There are arguments on each side.
Bitcoin has been called digital gold and it's easy to understand why. Only approximately 21 million bitcoins will ever be created. New coins are minted every 10 minutes by bitcoin miners who help to maintain the network by adding new transaction data to the blockchain. There are 2,259,368.8 bitcoins left to be mined and the last coin is expected to be mined in the year 2140. Limited supply translates to rarity and intrinsic value.
After originally dismissing Bitcoin and other cryptocurrencies as "scams", institutions are now adding them to their balance sheets. Telsa, Micro Strategies and Ruffer have made the headlines, but the initial doubters have quietly been investing as well. Blackrock, the world’s largest asset manager, has started to invest and JP Morgan has created a "Cryptocurrency Exposure Basket” of Bitcoin proxy stocks. They've even set a $130,000 price target for Bitcoin.
While alt coins don't have the limited supply of Bitcoin, many retail and institutional investors have recognized their potential to drive a decentralized payment economy. With the explosion of decentralized finance (DeFi) and the increased usage of smart contracts, the best alt coins tend to belong to the best projects and companies in the blockchain space. These DeFi tokens offer more than just speculative value; they have real revenues and great utility within the DeFi industry.
But as the recent price fluctuations have demonstrated, crypto as an asset can be volatile. If you have short-term needs, make sure you take profits and only invest funds you can risk to lose or have tied up for 2-4 years.
Crypto as Currency/Payment
When Bitcoin was created in 2009, the original white paper defined the market as "an electronic payment system that would eliminate the need for any central authority while ensuring secure, verifiable transactions. In short, the document described a new form of currency, one that allowed for trustless payments on the web – that is, they require a minimal amount or even no trust between parties." However as discussed the rarity of bitcoin has lead to the current use case for the cryptocurrency as a store of value and a hedge against inflation.
The Asset argument aside, Bitcoin has design limitations that make it less than ideal for payments. Proof-of-Work (PoW), the consensus mechanism used to create blocks, is energy-intensive and time-consuming. Bitcoin’s smart contract capabilities are also limited.
Altcoins improve upon Bitcoin’s perceived limitations to establish a competitive advantage. Several altcoins use the Proof-of-Stake (PoS) consensus method to minimize energy consumption and the time required to create blocks and validate new transactions.
Ethereum was designed to address some of Bitcoin's limitations. Ethereum laid the foundation for what is now known as decentralized finance (DeFi). Ethereum’s early success has led to a large portion of the DeFi space relying on Ethereum’s blockchain. But high gas (transaction) fees has proven to be a major shortcoming.
Then there is the debate over decentralized and centralized crypo/blockchain. Cardano is a public blockchain platform created by the cofounder of Ethereum. It is a permissionless blockchain at its core, designed to utilize sidechains and decentralized applications to offer a very dynamic financial use case for developing countries. it is seen and an improvement on Bitcoin's original vision.
Ripple is an open-source platform and supports currency, commodities, cryptocurrency, or other units of value. It is a permissioned ledger designed to be used in the legacy banking system. As a centralized system, traditional financial institutions view it as a way to realize the benefits of blockchain while maintaining control.
So are they Assets or Next-Gen Payment solution?
Simple answer, it depends.
For developing countries and businesses that need faster and cheaper payments, cryptocurrency and blockchain are the future. The recent excitement from investors has accelerated adoption. Governments are scrambling to catch up and launch their own digital currency. Most now agree that blockchain and crypto are the future.
And the supremacy and rarity of Bitcoin, will insure it's position as an investment and an inflation hedge. The top alt coins will attract capital as they make the case to solve specific payment problems. And there will continue to be an influx of speculative coins that promise parabolic returns. The fear of missing out (FOMO) insures cryptocurrencies will be part of every investor's portfolio.
Cryptocurrencies are here to stay. Looking forward to what the future will bring.