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Cryptocurrency, the new generation of money

In the past decade, we have seen the dominant status of the US Dollar slowly eroding over time. The emergence of China as a global economy, strained trade relationships between the US and China, a collapsing US economy, a global COVID-19 pandemic, and domestic political issues are all contributing factors.

Amid this new level of economic and political uncertainty, a new winner has emerged. A source of value transferred over new technology known as blockchain that we call ‘cryptocurrency’. And the undisputed king of crypto is, undoubtedly, Bitcoin.

The first cryptocurrency, Bitcoin, was created to function as a means of payment and to create ‘a peer-to-peer electronic payment system’. However, it quickly turned into a store of value subject to speculative interests. Later experiments such as the Ethereum project expanded the functionalities and diffusion of crypto assets through the introduction of a technology known as ‘smart-contracts’, which facilitated the ability to create and circulate digital tokens ‘on-demand’.

Bitcoin managed to evolve into a store of value before our very eyes in the space of less than a decade. For the last few centuries and today have had gold as the main store of value. It’s no secret to anyone that the gold market is valued at slightly above $8 trillion. In the future, there is little doubt that Bitcoin will have an incredible opportunity to replace gold as the main store of value.

“Gold has been reliable and had a 5000-year run. However, history teaches us a 100% of the currencies which existed until 300-400 years ago, have all went to zero. There is absolutely nothing different about the US dollar or any other fiat currency out there. In time all of them will be revealed to be Ponzi schemes.” CryptoOracle  founder Lou Kerner

The rise of digital assets known as cryptocurrencies has shifted the focus away from gold, which has historically been the best way to transfer economic value over time. For centuries, gold and silver were globally recognized and accepted as a store of value. Albeit difficult to transport and store it was easy to verify their authenticity, they are censorship-resistant (a corrupt government can’t easily take it away from you) and scarce (Supply is somewhat known at ~200,000 tonnes above ground and ~2,500 new tonnes are mined each year). These three components underpinned gold’s status as a preferred store of value in times of crisis and economic turmoil.

It’s difficult to predict where Bitcoin prices are going in the short-term but if Bitcoin lives up to its potential as the digital replacement of gold. Many analysts and experts predict prices in the region of $150,000 to a staggering +500,000 USD in 5-10 years. While it is still early to know for certain Bitcoin will reach such heights, more and more crypto analysts and investors are talking about the stability of the asset’s growth. No other financial instrument has been able to make the 200% returns that Bitcoin has and projections of $288,000 between now and 2024 are now considered average.

Along with the exponential growth of the valuation of the cryptocurrency market, policy-makers are concerned that not only a European but an international approach would be necessary to effectively regulate these new financial networks [1]. As crypto-asset’s market players operate globally, in fact, regulatory and enforcement efforts at a national level might push firms towards less regulated jurisdictions. This would imply missing market opportunities, as well as jeopardizing investor protection because tokens can be sold to European investors from other jurisdictions as well. Given this risk of regulatory arbitrage, a balanced regulatory approach is preferable in order to bring crypto-assets and related businesses under the EU jurisdiction and enforcement capacities.

While the potential of the nascent crypto sector is clear, it remains challenging to navigate for investors and the average user with little to no understanding of digital assets and blockchain technology. A reliable partner like FiCAS offers investors the opportunity to diversify their portfolios by gaining exposure to the new class of crypto-assets through easy-to-access, liquid, actively managed products.

^[1] European Securities and Markets Authority (ESMA), ‘Advice on Initial Coin Offerings and Crypto-Assets’, ESMA (2019).