Here we go again. Crypto is on the move once more, with its architect-in-chief, Bitcoin, reaching all-time highs of $40K in the past few weeks and the entire crypto market capitalisation breaching $1 trillion.
Cue the eye rolls, and familiar mantras trotted out by the uninformed: “it’s not a real asset; it’ll all come crashing down; it’s too volatile.” The difference is, this time, these oft-repeated criticisms are considerably more subdued. Today, many former sceptics are converts. Indeed, one of the most compelling features of the latest crypto boom cycle is the lack of fanfare accompanying it — indicating the maturation of the industry.
The last boom cycle in crypto took place in 2017 when Bitcoin peaked at $19,600, with the digital currency plunging 65% in value in the weeks that followed. What has changed in the years since then? Strangely enough, not a great deal. Sure the currency has developed on a technical level, but it remains at its core unchanged since its genesis block in 2009.
What has changed is the entire world around Bitcoin and crypto. Bitcoin is no longer viewed as a shadowy means of payment on the dark web, but rather an entirely new class of asset, a means of storing wealth and a potential hedge against inflation. While this may not have been the original vision of Bitcoin’s anonymous creator, Satoshi Nakamoto, who envisioned the technology as an electronic peer-to-peer (P2P) payment system–Satoshi’s dream of democratised finance is far from over.
A swathe of innovative crypto and blockchain-based technologies have found their way to market which can achieve this goal far more successfully, with less volatility and greater scalability than their precursor. Diem (formerly Libra) is the most prominent example of such a network, but, there is incredible innovation occurring throughout the blockchain industry, which is on the cusp of revolutionising global finance.
While Bitcoin, for the most part, no longer operates as a P2P payment system, in many ways, it has become far bigger than once envisioned. Bitcoin has emerged as an asset that institutional investors and large corporations turn to as a core asset in their portfolio and treasury allocation. Institutions like MassMutual, Ruffer and MicroStrategy have poured vast sums of capital into the cryptocurrency; with BlackRock, the world’s largest asset manager with $7.81 trillion under management, recently enabling two of its funds to invest in Bitcoin futures.
Institutional interest in Bitcoin has accelerated due to various factors, not least the economic climate in which we find ourselves. Central Banks across the globe are pumping unprecedented levels of stimulus into the economy due to the pandemic, with Bitcoin viewed as a useful asset by investors to hedge against inflation. With a new administration in the US, further stimulus is likely on the cards, accelerating further interest in Bitcoin.
Fear of missing out is beginning to emerge among institutions, with vocal, former sceptics such as JPMorgan CEO Jamie Dimon, moving away from a negative stance on the asset to building their own digital asset use-case.
Increased regulatory clarity is also acting as a catalyst for major players to enter the space. Where once investors were hamstrung by regulatory concerns regarding the state’s view on crypto assets, now, regulatory authorities in the US have begun to offer a clearer stance. Banking regulator, the Office of the Comptroller of the Currency (OCC), recently issued guidance that banks can provide crypto custody services for clients. With clarity in hand, the largest investment banks in the US are likely to move quickly in their digital asset roadmaps. As the global leaders in finance, this will have a ripple effect in prompting retail banks, hedge funds, and other financial institutions across the globe to follow suit.
The EU meanwhile is even further ahead, with its regulation on Markets in Crypto Assets (MiCA) proposal, a comprehensive framework for the legislating of crypto assets across the 27 member states. A number of states such as Germany, Luxembourg and Switzerland have also enacted clear legal frameworks for blockchain and digital assets nationally. Germany, for example, has fully integrated the custody of crypto assets into banking laws, with over 50 financial institutions already expressing interest in a custody license.
It is clear then that the crypto boom cycle of 2020-21 differs fundamentally from 2017-2018 in terms of the nature of the actors involved. This new category of investor also strengthens the legitimacy of the market through its market activity. Unlike retail traders–easily spooked by swings in the market, and with a tendency to buy and sell quickly–institutional investors will largely be looking at a buy and hold strategy for Bitcoin. This longevity offers greater stability to the market and reduces the likelihood of any sudden sell-offs.
Bitcoin and crypto has entered a new phase of maturity. While the volatility, and the uncertainty of previous crypto boom cycles are behind us, it would be foolish to assume that there won’t be twists and turns for crypto to come in the months and years ahead.
However, in the long term, the trajectory of crypto looks promising. With the Bitcoin market cap sitting around the $600 billion mark at present, there is tremendous scope for the asset to build on its narrative as digital gold, and eat into the market cap of physical gold, perhaps valued at $11-12 trillion in present conditions. If that argument holds water –– that potential growth of that scale remains –– then the story of crypto remains at the beginning.
David Wachsman, CEO and Founder of Wachsman a leading professional services firm for organizations leveraging emerging technologies to achieve their missions. Founded in 2015, Wachsman has grown to become a global company with regional headquarters in New York, Dublin, and Singapore. Wachsman provides strategic advisory, communications, events management and production, and corporate development services.