The new age of crypto

Since its famous white paper in 2008, Bitcoin has confronted skepticism that a digital currency could coexist with other fiat currencies controlled by central banks. Bitcoin was not accepted as a store of value or an alternative to gold or U.S. Treasuries. Investors struggled with how to define Bitcoin as it experienced extreme volatility and a spectacular crash in 2017-18. 

Bitcoin has been compared to the new-economy technology stocks from the late 1990s. When investors realized the valuation of tech shares was inflated, the Nasdaq imploded in March of 2000. It took 10 years after the tech bubble burst, but big tech made a major comeback as companies like Facebook, Apple and Microsoft became highly profitable and intertwined in daily life. 

The Office of the Comptroller of the Currency was the first regulatory agency to allow banks to provide custodial services for crypto in the summer of 2020, followed by state laws and Congressional bills to legislate the crypto industry and define boundaries for decentralized finance and decentralized autonomous organizations. 

In the fall of 2020, after years of sideways price action, Bitcoin rallied. “It was driven by investors’ realization that the pandemic was thrusting the digital payment system forward and Bitcoin was viewed as its bellwether,” said Ben Emons, a macro strategist at Medley Global Advisors. “Institutional investors adopted Bitcoin as an alternative asset class and significant flows of institutional money poured in.”

Introducing a top regulator of crypto like the Securities and Exchange Commission, a future central bank digital currency and Congressional legislation for crypto exchanges would remove regulatory uncertainty and allow for wider adoption of Bitcoin and crypto in the United States, Emons added. He believes adoption is likely to accelerate in 2022. 

The ease of deploying blockchain software on the cloud has lowered the barriers to entry to launch crypto exchanges. There are thousands of exchanges where Bitcoin can be purchased. It has already given investors easier access, and recent launches of exchange-traded funds and Bitcoin investment trusts have reached the audience of retail, or nonprofessional, investors.

With a clear regulatory framework pending in the U.S., states and cities could move ahead with adopting Bitcoin as a means of payment for salaries, services and goods. Cities like Miami and other crypto hot spots in the U.S. show the Bitcoin movement is unstoppable. Investors that foresaw this have experienced a compound annual growth rate of over 200%. But those investors who bought Bitcoin in the early days of 2009 — and held on to the volatile asset — achieved a total return of 5,200,000%. 

In comparison, Amazon stock has returned “just” 68,000% since its listing in 1997, Emons pointed out. Apple and Microsoft delivered over 200,000% according to Bloomberg data. Despite Bitcoin’s shortcomings and volatility, digital asset returns proved superior to financial asset returns.    

Such astronomical results are unlikely to be repeated, Emons said. The competition for the digital reserve currency is heating up. There are a total of 20 central banks that are planning or have launched a central digital bank currency. Stablecoins are likely to be the first crypto assets to be federally regulated but that will not deter demand, and stablecoins will continue to play an important role in the crypto ecosystem. 

For similar reasons, Bitcoin is therefore not expected to lose its status, especially not as a tradable digital asset, even though a central bank digital currency in China is expected to soon to be fully launched. But like any relatively new technology, the more adoption and usage, the lower the cost due to price competition. 

In the case of Bitcoin, there is additional liquidity premium because it is tradable across many unregulated crypto exchanges. The number of Bitcoin transactions is falling to an average of 250,000 per day although the number of Bitcoin wallets is expected to rise to 200 million in 2022. 

Bitcoin has matured and is accepted now as an alternative asset class. Its wider recognition as a financial asset is a breakthrough. With this maturity and wider adoption, Bitcoin’s valuation in dollar terms has significant potential to rise with lower volatility than in the past.