It is a universal truth that money is a way to transfer economic value over time and space.
However, in the past decade alone, we have seen significant changes and transformations in how people transact and invest.
Gold and silver have been globally recognised and accepted as a store of value for millennia. While difficult to transport and store, verifying their authenticity was easy. They are also 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 mined each year). These three components underpinned gold's status as a preferred store of value in times of crisis and economic turmoil. 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.
Eventually, paper money came to be considered a better way to pay for goods and services. And for a long time, it was. At least until President Nixon famously took the US and the world off the Gold Standard 50 years ago. Despite promises that the US Dollar would retain its full value, a dollar today is worth only about as much as 19 cents in 1971.
A new winner has emerged amid this new level of economic and political uncertainty. A source of value transferred over new technology known as blockchain that we call 'cryptocurrency'.The rise of these digital assets has shifted the focus away from gold, which has historically been the best way to transfer economic value over time. There are many cryptocurrencies, but the most known one is definitely Bitcoin.
Bitcoin was a direct answer to the Lehman crisis - just a few months after the US investment bank Lehman Brothers Holdings Inc. filed for bankruptcy in 2008. People's faith in banks was shaken so much that the prospect of a new class of assets which was not in control by the formal or third-party authority was enticing, and some saw it as a way towards a fairer, more transparent, equal, and democratic distribution of wealth.
The rise of crypto
And so the rise of cryptocurrencies and blockchain technology began that year when a white paper was released online. It provided a new way for people to transfer value online. Over the next decade, the various phases of this disruptive technology have been defined. During the bull markets, investors have experienced massive volatility and a period of euphoria. They have also experienced moments of despair and fear.
Bitcoin managed to evolve into a store of value in the space of less than a decade. For the last few centuries, gold has been the main store of value. It's not surprising that the gold market is valued at slightly above $8 trillion. At the end of 2021, Bitcoin's market cap sat slightly above $60 billion. There is little doubt that Bitcoin will have an incredible opportunity to replace gold as the main store of value in the future.
Throughout history, centrally issued money fails because the issuer abuses their ability to debase the currency or print more of it to meet their liabilities. This damages people's trust in the system and often leads to its collapse. Bitcoin's Founder, Satoshi Nakomoto, commented on this in 2009:
The root problem with conventional currency is the trust that's needed to make it work. Central banks must be trusted not to debase currencies; however, the past history of fiat currencies demonstrates a number of breaches of that trust.
When the US Dollar stopped being backed by Gold, the Federal Reserve could essentially start printing cash on demand. This newfound ability has been abused to such an extent that it contributed to several recessions in the US and abroad. Most recently, newly elected US President Joe Biden's response to the post-lockdown economy slowdown is a $1.9 trillion stimulus package.
In contrast to central bank monetary policy, in which some decide how much money to print when to print it and who to give it to, Bitcoin has a fixed emission curve that is determined by mathematical code and that no one can change at will. In Bitcoin, we all know that at the beginning, 50 BTC were generated per block and that on average one block is mined every 10 minutes. We also know that the issuance of new BTC is halved every 210,000 blocks. After issuing 50 BTC per block, 25 BTC was issued per block, then 12.5 BTC per block and now 6.25 BTC per block.
Bitcoin is a far superior financial network to traditional financial systems, as once you have it, you can move value 24/7, for a fraction of the cost and with a final settlement after every transaction. This makes the entire transaction both secure and flexible.
Technology behind it
Cryptocurrencies, like Bitcoin, feature blockchain technology, which makes the system easy to track and more transparent. The blockchain is a distributed ledger or database which is shared among a computer network. The information is stored digitally and contains a secure and decentralised record of transactions, guaranteeing the security of the data without the need for a third party.
What's even more – the new supply of BTC issued by a protocol is distributed in a fair and well-known manner to all miners who work on their computing power 24/7 to keep the network safe worldwide. Initially, this meant that anyone looking to mine Bitcoin could enter a global competition to benefit from the network's fair(er) distribution.
In the new and unique case of blockchain technology, technological innovation took the specific form of an actual currency or commodity called Bitcoin. The result is that we get to see the effect of Amara's Law playing out historically in markets trading worldwide. This refers to the impact of all ground-breaking technological advancements. It is greatly overestimated in the short run, but also underestimated in the long run.
While cryptocurrencies still depend on outdated infrastructure, that won't be the case 10 years from today. Infrastructure inversion in payments will happen when banks and financial service providers start using Bitcoin, Ethereum and other blockchains to settle payments instead of outdated systems like SWIFT. This is already happening as the Office of the Comptroller of the Currency now allows US banks to use public blockchains to facilitate payments for their customers.
The present and the future
The strongest testament to Bitcoin's status as a new form of storing and transferring value is how white-label investment houses, banks and governments have come around. In just a few years, many institutions and regulatory bodies went from openly opposing the new technology to embracing it and even introducing new regulations, products and services to capitalise on the billion-dollar market cap of cryptocurrencies. Merrill Lynch, Goldman Sachs and Morgan Stanley have all rushed into the crypto market and now offer Bitcoin futures to their clients.
Cryptocurrencies were once written off by financial institutions, central banks and governments. But they have been inching their way to the mainstream every day. There are already multiple crypto exchanges and trading solutions, proving that this industry is growing and scaling to meet the increasing demand from crypto users who want to pay using crypto.
As the crypto market enters its second decade, one thing is clear: Crypto and blockchains are not going away. Today, crypto assets boast a combined market cap in excess of $350 billion as the value of the cryptocurrency market topped $2 trillion. Despite a bear market in 2022, we continue to see the crypto markets boom and mature, with different sectors flourishing and largely outperforming bitcoin. While bitcoin only managed to return 59.8% last year, the crypto sector's total market cap grew by 187.5%, with many of the top coins offering four- and even five-digit percentage returns.
On a year-to-date basis, the cumulative crypto market capitalisation has surged by 2.75 times or 175.6%, from $776 billion as of January 1st to $2.1 trillion as of December 20th, 2021.
In March 2021, the total market capitalisation of DeFi registered an additional USD 39 billion, which is a 39x increase from its previous value of around USD $1.01 billion. By 2022, its total value had crossed the $100 billion mark. This remarkable increase in value was due to the exponential growth of DeFi's total value locked. DeFi is not only an exponentially growing subset of the crypto sector but also one of the biggest wealth-generating phenomena in the world.
A decade after Bitcoin was first introduced to the world, the cryptocurrency market cap stands at over $3 trillion. Despite the impressive growth of the market cap, it is still only a fraction of the US S&P 500 index's value. As of December 2020, the value of the S&P 500 is around USD $33.4 trillion. This indicates that the market is still in its early stages of growth. It also shows that there is still a lot of potential for the cryptocurrency industry.