Group Deputy CIO and Head of StashAway Hong Kong
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It’s been a big month for crypto: the US introduced its first bitcoin futures ETF, and bitcoin and ether reached all-time highs. Facebook announced its corporate rebrand to Meta, causing metaverse tokens, such as Decentraland’s in-world currency, MANA, to soar in value.
Many of our clients are excited and intrigued by the news. Is crypto here for the long term, and does it have growth potential?
With the recent headlines, we thought we’d share just how we’re reading into the latest trends by looking at the long-term growth potential of crypto and the technology that powers it, blockchain.
Cryptocurrencies, such as Bitcoin and Ether, are highly-secure digital, or virtual, currencies. Many of them are based on decentralised networks, meaning that no single central authority can exclusively access, issue, or control them. And that makes it very difficult - if not almost impossible - to interfere with or manipulate them.
That decentralised network is possible through blockchain technology. Think of blockchain as a system that organises how data is stored: it allows digital information to be recorded and distributed but not edited.
For example, when you make a payment with cryptocurrency, not one computer but many manage and record the transaction. Records are clustered into blocks, and those blocks are strung together with other blocks in chronological order, making the network, or chain. That chain exists as an immutable, public ledger of all the transactions.
Bitcoin is a type of cryptocurrency, and cryptocurrencies are built on blockchain technology.
Blockchain has the potential to disrupt traditional banks. But cryptocurrencies are still highly volatile; new announcements, speculation, and the markets can cause high, short-term volatility. So to understand its growth potential, we need to look at the big picture.
If we look at bitcoin, the largest cryptocurrency, we can begin to understand how widespread digital currencies have become.
Although bitcoin has only been around for the last 12 years, it’s quickly catching up to the market size of asset classes that have been around for thousands of years. With a market capitalisation of $1.2 trillion USD, bitcoin is about to take over silver’s market capitalisation of $1.3 trillion. And, some experts believe that bitcoin is on pace to catch up to Gold’s market capitalisation of $11 trillion USD.
Of bitcoin’s capped supply of 21 million coins, companies now hold 8% of the total supply, led by business intelligence company, Microstrategy, financial services company, Square, and electric car-maker, Tesla.
On top of that, major institutions have started offering crypto payments for online goods and services, including Visa, Mastercard, and PayPal.
Bitcoin is in a growth phase on the Adoption S-Curve, which charts the typical adoption path of breakthrough technologies. This estimate is based on the total addressable market of bitcoin versus its current levels of market penetration, suggesting that there’s significant room for long-term, future growth.
Crypto’s success in the past few years reveals more than just the growth potential of the digital currency. While crypto is the most common use of blockchain, several industries are developing and using blockchain for many other use cases.
That’s why we’re not only looking at crypto’s potential but also blockchain’s. Here are some key ways blockchain can disrupt industries and enable new ones:
Hospitals and clinics can use blockchain technology to securely store patient records, such as credit card and banking information and health and genomic testing records. At the same time, blockchain makes it easy for patients and healthcare providers to share the same information quickly and securely.
A company can employ blockchain to create digital records for its supplies to improve traceability and reduce administrative costs. This application makes it possible to track physical goods from production to delivery, right to the customer.
Non-fungible Tokens, or NFTs, are unique and non-interchangeable units of data stored on a blockchain, allowing individuals to own and trade assets digitally. Some artists are using NFTs to sell digital art and embed features that automatically give them a cut on any resale. Another example is the gaming world, where players can use NFTs to create, own, and trade unique in-game assets for money.
Our research all points to blockchain’s long-term growth potential. That’s why, as part of our thematic investing approach, we’ve included an allocation to a blockchain ETF in our Technology Enablers portfolio.
Investing in a blockchain ETF gives investors broad exposure to equities in various companies that develop and utilise blockchain technologies, including cryptocurrencies. A blockchain ETF may include companies that mine cryptocurrencies, such as Bitcoin and Ether, companies that have holdings in crypto, such as Paypal, and crypto exchanges, such as Coinbase.
No matter how you choose to invest in cryptocurrencies, remember to keep cool no matter the headlines. Cryptocurrencies are highly volatile: no one can predict the next crypto rally or even the next crash. Only invest in crypto if you believe in the big picture and can stick it out for the long term. Remember to stick to a plan, and don't take more risk than necessary.
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