Cryptocurrency Is a New Asset Class, Not Just Digital Money
The introduction to this blog post is a bit tangent, but it’s important to understand how cryptocurrencies work. The most common misconception about cryptocurrency is that it’s “just digital money.” Cryptocurrency has been around since 2009, and there are now over 800 different types of cryptocurrency out on the market today. That means there are hundreds of different ways to invest in crypto, not just Bitcoin.
The seven million people who have invested in bitcoin may only represent a percent of equity investors right now, but they’ve helped propel its price from nothing to $535, pushed its daily trading volume to an astonishing $1 billion a day, and brought its market capitalization up to nearly $1 trillion!
A new digital currency, Ether, was created in July of 2015 and became one of the world’s most popular cryptocurrencies of the time. It reached a $1.1-billion market cap within weeks from its release date. Investors were eager after they accepted it as an alternative form for crowdfunding the DAO project — that project raised 168 million worth of Ethers, or more than 1% ETH (Ether) tokens out there today!
But what exactly is an asset class? An asset class can be a group of investments with the same characteristics and subject to the same laws. It is common for there to be little correlation between different asset classes, but at times there may even exist an inverse relationship where two assets are negatively correlated.
Financial advisors often use this knowledge to help investors diversify their portfolios by investing in various types of securities so they will not see drastic swings that could happen from one type being highly valued or depreciated significantly instead of handling all your money on just one stock.
So then, how are cryptocurrencies a new asset class? Read on and find out!
The first lens through which investors evaluate bitcoin whether or not it’s investable. That means that they must ask the question, “can investors or individuals take capital and somehow have exposure to this asset class?” The answer was yes based on two points:
- The average volume of $1 billion per day from 2016 and onwards.
- When comparing its trading levels against other well-known investment funds, such as those for Gold Exchange Traded Funds(GLDs), Real Estate Investment Trusts(REITs), among others, Bitcoin has roughly the same liquidity.
As Bitcoin’s popularity spreads across the globe, so does its liquidity. Due to how global assets, such as gold, are limited by national borders, it causes them to be more susceptible to manipulation and monopoly from a single entity or region in contrast with Bitcoin’s international exchangeability.
As investors continue taking notice of Bitcoin’s accessibility worldwide through increasing trading volume on exchanges outside the U.S., they also realize that it fosters much greater liquidity than other restricted nation-based currencies like GLD (Gold).
Thus, the future of investing may lie in the crypto markets. Estimates show that a growing number of people will own cryptocurrency overstocks with publicly traded companies, as well as silver and gold. In fact, Gen Z has already jumped on this and has started investing in cryptocurrencies overstocks. Cryptocurrency trading is only becoming more popular, which means it could be poised to overtake other financial tools for investors looking to make money on their investments, both big and small.
The most intriguing thing about cryptocurrencies is that they are not like any other primary asset class. They have a new form of backing, control, and purpose, making it different from anything else on the market today.
Cryptocurrencies can be used for transactions (the most common being bitcoin and Ethereum, for example) with nearly instant money transfers at little to no cost– but what makes them so valuable? Investors quickly point out that because this currency was created digitally without human consensus or involvement, their value could skyrocket infinitely as people start using these coins more frequently worldwide!
The protocol, which governs a distributed network of computers and dictates how they work together, sets cryptocurrencies aside from other traditional currencies. Unlike fiat money controlled by governments with monetary policies established for the people on their end, cryptocurrencies operate differently because it doesn’t depend on any singular government to hold power over its production or distribution. Instead, it relies entirely upon math code implemented onto multiple computer systems all around the world.
Blockchain’s ability to automate contracts is groundbreaking, and it will change the way we do business. No longer will a contract be just ink on paper, but every detail of an agreement would automatically execute when certain conditions are met. No commodity or real-estate contract, for example, has this type of self-executing provision.
Risk & Reward Profiles
The Sharpe Ratio is a measure of risk-adjusted performance that shows how much return you get for the given level of risk. With Bitcoin, it’s pretty easy to see just how great this ratio can be because its value was so high and outperformed all other asset classes.
When looking at an investment opportunity, investors consider what they want and their tolerance for volatility, which will affect their potential returns, including any future losses due to declines once prices go up again after periods with turbulent trading patterns.
The Maturation of Cryptocurrency
Bitcoin was initially seen as an investment that is not worth the risk, but this seems to be changing.
Bitcoin was considered a risky, volatile asset that attracted many speculators and investors looking for big payouts. It seemed like people were jumping on board just because of its popularity and potential rather than any genuine interest in understanding what Bitcoin really represented or how it could benefit them personally. Then suddenly, something changed. In recent years, starting from about 2018, Bitcoin behaved more similarly to other investments such as equity markets with less volatility yet higher returns.
Cryptocurrencies are still a relatively new technology that — though not as speculative an investment because they are traded more often than now than years ago — do provide some level of protection from inflation for those who use the currency.
Crypto’s reputation has shifted dramatically in recent years. Trading cryptocurrencies used to be seen strictly as gambling and speculation, but now they make up about six million transactions per day globally.
When we started to educate ourselves about cryptocurrency, it became clear that this is a new asset class with many of the characteristics of other traditional investment vehicles. The economic profile is similar, and so are the risk-reward profiles.
That means that crypto can be used as an alternative vehicle for investors looking to diversify their portfolios or hedge against volatility in other markets. We’ve seen how quickly cryptos have matured over time from just being digital money to now having real value on the global stage, both economically and politically.
Hopefully, you found today’s blog post helpful when considering whether or not cryptocurrency should be part of your portfolio strategy! If you’re interested in learning more about investing in cryptocurrencies such as Bitcoin, Ethereum, or Litecoin, visit us at Unbanked. We’re happy we get to witness the maturation of crypto first-hand, and we look forward to watching it grow into an economic powerhouse in the future.