Cryptocurrencies, such as bitcoin, are set to be a viable alternative asset and are quickly gaining traction within investor portfolios globally. The history of money sheds light on why this might be so.
History of Money
Money has been in existence for thousands of years, existing to perform three functions:
- Store of value — Enabling people to keep their wealth in a widely recognised format.
- Medium of exchange — Enabling people to exchange value with each other.
- Unit of account — used to communicate the value of a good or service in an easily recognisable format.
Since its inception money has evolved from simple shells and pebbles, through precious metals, to paper currency, and now digital currency. Cryptocurrencies like bitcoin are the first form of a purely digital currency that enables a connected generation to securely transact and store wealth and transfer value on the internet.
Basis of Value
Cryptocurrencies derive their value from the market forces of demand and supply, which applies to most traditional assets such as gold, stocks and property. Bitcoin has a limited supply, capped at 21 million coins, and there are currently roughly 17 million coins in circulation. The demand for the coins is propelled by its utility as an online medium of exchange and store of value. This means that if the demand continues to grow, the price of bitcoin will only rise due to its limited supply.
It is also important to note that as much as the price of bitcoin might seem high right now, hovering at around $7,500 in June 2018, its overall market cap is still quite small sitting at $200bn. More traditional asset classes are valued in the trillions of dollars. This is part of the reason why bitcoin is prone to frequent market shocks that lead to the high levels of volatility in its price. This volatility is expected to reduce as this asset class matures and hits multi-trillion dollar valuations.
Accessibility and Liquidity
Users have access to multiple ways in which they can convert their digital asset into cash and vice versa. These methods are quickly being localised on a global scale thanks to the permission-less nature of the bitcoin protocol that enables anyone, anywhere to develop their product on top of it. Users can now transact using websites and apps, such as Coinpesa, that are integrated with common payment gateways like banks or PayPal. Other avenues include ATMs and peer-to-peer services like localbitcoins where users meet in person to complete the trade offline. All these access points contribute to the growing global trading volume of cryptocurrencies, which now sits at about $4bn a day.
Historical Performance and Market Opportunity
The digital asset market has grown over the years into the billions of dollars. During that time various assets like bitcoin have generally outperformed traditional asset classes. This trend is going to continue as the product matures as an asset class.
For example over the last five years, bitcoin has generally outperformed the well know traditional assets.
It is clear that bitcoin investors have enjoyed the last seven years when compared to their peers in the other markets. The ride, though, was not always smooth. There were moments of extreme volatility, like in 2014 when the market crashed. Two major events caused the crash of 2014. There was a market correction after a stellar year and the largest cryptocurrency exchange, MtGox collapsed. These kinds of events are going to become less and less likely as cryptocurrencies mature.
The digital asset space is still small compared to other traditional assets and is expected to continue to grow over the next couple of years as it becomes a dominant asset type. There is still an opportunity to realise incredible returns for new entrants.
Is Investing in Bitcoin a Good Idea?
Investment in the blockchain and digital asset space has seen a massive increase year on year since 2012. Investors are taking different approaches to creating wealth from the digital asset markets. Some are buying to hold, others are day trading, others mining and still others are building companies on top the technology. There are many ways in which one can participate in the digital asset economy. Here are some numbers to indicate both the current size and growth of bitcoin:
- $3.2bn is the approximate cumulative funding received by blockchain startups from venture capitalists since 2012.
- $22bn is the digital asset average daily trading volume for May 2018.
- $141bn Bitcoin’s current market cap of up from $1.6bn five years earlier.
- 11.5m the estimated number of unique active users of cryptocurrency wallets in 2017, up from between 0.6 mln and 2.6m four years earlier.
- $16m the average daily revenue generated from Bitcoin mining in May 2018, up from $46,000 five years ago.
It is obvious that the smart money is already actively playing in the space and the space is exponentially growing.
The world will continue to get tokenised and the market cap of the major cryptocurrencies will grow to the trillions of dollars within the next five years. Once this happens, it would place the price of assets like bitcoin in the hundreds of thousands of dollars per coin. In fact, the founder of McAfee anti-virus software, John McAfee, placed a public wager that bitcoin will hit $1m by 2020. No one knows for sure what will eventually happen, but at the moment all the signs point towards a highly tokenized world with majority of the global wealth being digital.
Acquiring knowledge early, on all the aspects of this rocketing industry will prove to be the most valuable investment over the long term. Knowledge is power and now is the time to position one’s self for the next industrial era.
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