New Year, Same Run; Crypto assets v Cryptocurrencies

January 13, 2021

2021 Begins with a Sprint

Well, it’s a new year but it feels a lot like the old year.  It’s been a period of all-time highs and not all of these highs are good.  With Covid rates spiking and hospitals overflowing, that’s not the kind of high that we want (everybody please stay safe out there!)

In the world of bitcoin, however, all-time highs are an excellent thing, and November and December were banner months for the reserve asset.  After surging to dance with the all-time high of $19,783 on November 30th, bitcoin spent most of December reaching – and then exceeding  – all time highs seemingly on a daily basis, ultimately ending the year just north of $29,000 per coin.

During this process new milestones were achieved in the history of bitcoin.  One notable one was that as of the day after Christmas the market cap of bitcoin exceeds Visa’s market cap.  Think about that for a second.  The Bitcoin network, which is really a payment network, is now worth more than one of the seminal financial instruments of our times.  Yes, this is happening…

Ups and Downs

The old adage states “what goes up must come down.”  In the case of crypto it would seem it then goes up again.  Starting off the year with no loss of energy, bitcoin made a mighty sprint to touch 41K on January 9th and then had a sharp 20% correction and fell back into the mid-thirties. While some have expressed concern over this we don’t, and I would note that even at that price we’re still looking at 20% gains in the first 12 days of the month.  I’ve said before that the crypto universe requires looking at it with a wide-angle lens as such corrections are common in the world of crypto assets. In fact the wild capitulation in 2013/2014, when bitcoin bounced between hundreds to thousands then back to hundreds of dollars, now just looks like a straight line when viewing a graph and comparing to the current highs.  Perspective Is everything.

During this correction which is in part due to profit taking, an interesting thing was noted: Whales (large investors holding over 1000 BTC) were buying the dip.  Rather than selling out of concern that we’ve reached market saturation they were accumulating at “discount” prices.

These “whales” now include institutions and over the past months we’ve been discussing the fact that wall street and institutional investors have been moving to bitcoin as a hedge against cash.  This is no surprise given that almost 24% of all US dollars were created in 2020 and I would expect to see more and more wall street titans follow Jack Dorsey, Michael Saylor and others and begin getting deeper and deeper into this world.  This is one of the main reasons that the rally we’re experiencing is very different than any other to date.  Big money is here.

Fed Empowers Stablecoins

The world talks a lot about Bitcoin but the rest of the cryptoverse tends not to get the same amount of press. Last month we discussed stablecoins – and it is interesting that since our last update we’ve seen the fed shine a green light on stablecoins for banking transactions. On January 4th the Office of the Comptroller of Currency (OCC) published a letter stating that  “blockchains have the same status as other global financial networks, such as SWIFT, ACH and FedWire.”  This is big news and its implications should not be overlooked.  Banks, moving to stablecoins for transactions and settlement, would have a solution that is lower cost and arguably faster.  In addition, these networks would possibly be “more resilient than other payment networks” due to the large number of nodes needed to verify transactions, which can, in turn, limit tampering.  In any case, such an endorsement is a huge green light to the blockchain and crypto asset space beyond bitcoin.

Cryptocurrencies

 

You’ll note that we’re constantly speaking of crypto assets, not cryptocurrencies. This is because currencies are yet a subset asset class inside the crypto sphere.  A cryptocurrency is, quite simply, a money use case of a blockchain solution.  Bitcoin is the most obvious, but there are many others, including litecoin, monero, dash, bitcoin cash, etc.  Their genesis is pretty straightforward.  These are, in almost all cases, replications of the Bitcoin network with rule changes to create different operating parameters. In essence the creators of these assets are attempting to build a better bitcoin.  In some cases, they create greater privacy. In others faster transaction times.  In general, however, the whole point of these assets is to act as money.  Some, such as litecoin, have gained traction as many speculative investors view litecoin as silver to bitcoin’s gold. Others are running into some challenges over their complete anonymity and, as such, are experiencing regulatory issues.

In any case, when looking at this asset class, we think it’s best to again look with a wide-angle lens. While it’s not impossible that one of them could become a worldwide currency, ultimately, it’s unlikely that they will supplant bitcoin.  Further, with the rise of stablecoins, the question of real usefulness comes into play.  When paying for goods and services for example, if something is $100, parties generally want to ensure that the transaction that occurs is $100 on both ends. That means limiting volatility, and these assets are not fixed in value. However, we do already have a federally sanctioned means of crypto-exchange that is fixed in value.  It is, you guessed it, stablecoins.  Bitcoin provides store of value and stablecoins provide the medium of exchange. So, while we don’t have a crystal ball, with the rise of stablecoins for value exchange, we would question the long term future of any of these alternative currencies.  Still, it’s important to know what these are as they continue to generate quite a buzz.

In Closing

There’s always much more to say but I’ll leave that for the next issue.  Instead I’ll leave you with a quick note of congratulations to Jake Ryan, our founder and CIO, as his recently published Crypto Asset Investing in the Age of Autonomy is now the #1 new release in business finance on Amazon!

This world is ever expanding and as the markets take a breath here we look forward to the next legs of this historic run.  There will be more to share next blog so until then be well, stay safe, and we’ll continue to Decrypt: Crypto for you!

About the author James Diorio

James is the Principal and Chief Executive Officer of Tradecraft Capital.