5 Reasons to Remain Optimistic on Digital Assets
On Saturday, 18th June the price of Bitcoin fell to around $17,700… its lowest price since 2020, and a 74% drop from its all-time high last November.
Now, it doesn’t take much for Bitcoin and crypto critics to declare the end of crypto… So when Bitcoin fell below $18,000 for the first time in years, you can imagine what happened.
There were — once again — proclamations of the death of Bitcoin as we know it… in fact the fifteenth declaration of Bitcoin’s demise in 2022 alone, according to Bitcoin Obituaries.
But these headlines aren’t anything new and certainly not just the preserve of 2022… people involved in the digital asset space see them every year, regardless of how crypto prices are moving.
And the articles rarely touch on anything novel or of substance — just price action — and uninformed quotes from people like billionaire gold bug Frank Guistra or 91-year old Warren Buffett, or the author’s personal feelings about crypto.
Fun fact: I have been a successful long-term investor for more than 25 years, but I hardly ever actually look at daily prices. It’s more often the case that someone in my investment team points out that a big price move has happened that day. For me, short term price moves are actually a pretty meaningless measure of long-term investment prospects.
What I have learnt over the years is that superior investment returns are much more tied to a company or project’s superior fundamentals, so this is what I spend most of my time trying to analyse. In contrast, I feel these daily gyrations just make people emotional which isn’t really helpful in investing. I started investing in digital assets two years ago and despite their enormous volatility, I am convinced that a longer term research-based analysis of fundamentals should be the key investment focus here too.
So today, I want to make a case for crypto’s attractive fundamentals and longevity… and give you 5 evidence-based reasons why we remain optimistic about crypto’s future.
Indicator №1: Growing Usage
Regarding this metric, it’s important to take a step back and look at crypto over the long term…
When you do, you get an idea of how much the market has grown over the last three to four years.
For example, there are over 300 million crypto users today… That’s a 10x increase from the roughly 30 million users at the end of 2018.
This user base is also spread out across the globe… Half of those users are in Asia, and there are users in every country.
But it’s not just more users… there’s more usage as well.
As you can see from the chart below, crypto usage — as measured by long-term crypto trading volumes — continues to grow.
Sure, volumes are not at all-time highs right now… But that’s missing the bigger picture.
Source: The Block
Overall, exchange volumes are up 647% compared to this time in 2018. That’s healthy growth and usage.
Another useful way to look at usage is to focus on Bitcoin’s “on-chain” volume… or how much BTC moves between digital wallets using the Bitcoin network.
This gives us a true read of activity on the Bitcoin network.
And as you can see in the chart below, Bitcoin’s on-chain volume has increased nearly 800% since 2018…
Source: The Block
That’s impressive growth in usage… and you’d be hard-pressed to find comparable numbers from almost any other asset on the market.
Bottom line: Adoption and usage are the most important metrics for determining whether crypto is dying or thriving… These numbers support the view that this technology’s future is bright.
Indicator №2: Venture Capital
The second reason to remain invested in crypto is venture capital (VC) funding.
Institutions are continuing to provide VC funding to crypto entrepreneurs and start-ups to help them expand a product or business.
It’s important to note that VCs are adept at profiting from early-stage investments and typically only focus on those sectors they see as most promising.
Continued VC funding in crypto — even after recent events — shows investor confidence remains unshaken in the sector’s long term prospects. We must remember that a specific crypto project has to pass stringent VC due diligence tests to win the investment in the first place. So these individual investments are important votes of legitimacy.
In 2021, venture capitalists invested over $33 billion into crypto and blockchain start-ups… an industry record, and 4x the funding in 2018.
Source: Coinbase, Galaxy Digital
Keep in mind, the Q2 number is the amount known to date, not the total for the quarter yet… so VC funding remains strong in 2022, despite extreme volatility in token prices.
And those numbers don’t include recent news… like the creation of a $4.5 billion crypto fund from VC firm Andreessen Horowitz.
Andreessen Horowitz likens the long-term opportunity in crypto to “the next major computing cycle,” after PCs, the internet, and mobile computing…
Bottom line: In line with the top VCs, we believe crypto represents the next era of computing, and that is why VCs are investing heavily to take advantage of this opportunity.
Indicator №3: Web 3.0
The third reason to remain bullish is Web 3.0.
Web 2.0 is the version of the internet we know today… and while Web 2.0 enables lightning-fast interaction and engagement on a global scale, it isn’t without problems.
First, there are internet gatekeepers like Amazon, Facebook, and Google… These companies not only have control over what we see online, they’re constantly tracking and storing our personal info.
The current internet model also largely relies on centralised servers and protocols. The problem is that this creates centralised points of failure that malicious actors can target.
But Web 3.0 is designed to solve these problems…
It enables decentralisation and user control of personal data via peer-to-peer networks… so people can transfer and store both data and financial value with no primary gatekeeper or point of control.
And although some in the media are quick to write it off as a fad, interest continues to surge, according to Google…
Google measures search interest on a scale of 1–100 relative to its peak popularity. A value of 100 is when the term was most popular. A value of 50 means that the term is half as popular as it was at its peak.
Even over the last seven torrid months, search interest in “Web 3.0” has been consistently high. Take a look…
Source: Google
There’s also an increase in Web 3.0 funding and usage when you measure the growth of Decentralised Finance, or “DeFi.”
DeFi is a broad category of financial applications developed on decentralised networks… and it has the potential to be even bigger than the traditional finance sector.
Back in November 2018, DeFi was just a small idea. There was only about $45 million invested across DeFi applications… Today, it’s about $135 billion. That’s a massive 3,000% increase.
And usage of decentralised exchanges remains strong too…
Source: The Block
As you can see in the chart above, monthly decentralised exchange volume is up 2,651% since July 2020.
Bottom line: All this shows that Web 3.0 is more than just a marketing line… It’s a massive and fast growing industry.
Indicator №4: The Merge
The fourth reason to remain optimistic about the cryptocurrency market is “The Merge”… that’s the name for the next evolution of Ethereum, the second largest Crypto network.
I don’t want to get into the weeds, but here’s a brief explanation…
We’re about to see a major reduction in ETH’s incoming coin supply, thanks to the Merge.
This is when Ethereum transitions from a Proof-of-Work (PoW) protocol to a Proof-of-Stake (PoS) consensus protocol.
In the PoW model, crypto miners solve complex maths problems to validate transactions and earn a reward… think Bitcoin mining.
With PoS, token holders validate transactions by staking ETH on the network, and the network determines who receives the award.
Since PoS networks don’t rely on warehouses full of mining equipment, they’re far less expensive to run (read: margins go up substantially)… and networks can therefore issue far fewer tokens as rewards. This creates scarcity by reducing the incoming supply of tokens… and scarcity increases the token’s value.
Ethereum is in the process of switching to PoS right now… And when it’s complete, we’ll see as much as a 90% reduction in the amount of new ETH coming to market.
So after the Merge, there will be fewer ETH tokens in circulation — making each more valuable. We actually believe ETH might become the first truly deflationary token in the whole sector as a result.
Plus, our research suggests vast amounts of money is sitting on the sidelines waiting for Ethereum to complete its Merge…
Institutional money managers are getting a lot of heat from people demonising proof-of-work because of its energy-intensive nature. A move to proof-of-stake kills that ESG argument and clears the way for further investment.
The other consideration is that institutional money managers don’t like risk. It’s far safer for them to wait until Ethereum’s move to PoS is complete…
And the good news is that they won’t have to wait much longer.
Ethereum completed its first successful test of Merge in early June, and there will be two more tests very soon.
Ethereum developers say the Merge could happen as soon as August if these additional tests are successful.
Bottom Line: one of the most exciting events ever is happening in the crypto sector this year, an innovation that transforms the tokenomics of one of the largest crypto networks beyond recognition, and also solves the ESG issue.
Indicator No 5: Myriad of Innovations After Bitcoin
I have kept the most compelling reason for last. The most important reason to remain invested is actually nothing to do with Bitcoin! The reason you see Bitcoin talked about everywhere is that this industry is at such a nascent stage of development that the best data is really only available on Bitcoin.
But since Bitcoin was launched in 2010, we have actually seen a whole host of innovations emerge after this first blockchain idea…Innovation has been — and I believe will continue to be — the source of seismic growth and adoption of crypto into the future.
Ethereum was the first cryptocurrency innovating on the Bitcoin idea by offering a cheaper and easier to use means of payment. As you can see from the chart below, Ethereum has gone on to generate staggering monthly revenues even compared to Bitcoin!
Source: Token Terminal
The reason I believe these newer innovations are arguably more important in terms of the growth outlook for the sector is that they actively help blockchain technology become relevant for a growing list of real world uses…. Taking the analogy of the early internet days, Bitcoin was just the first (very good) idea — think Myspace before Facebook or AOL before Yahoo or Google — but it was only when smart people improved on these initial ideas and made them more user friendly, cheaper etc, that you really saw the big successes and massive increase in usage of the internet. This is exactly the stage we believe crypto is at right now and what we believe will happen going forwards in the sector.
What’s more, the evolution from Bitcoin is not just limited to Ethereum… As you can see in the chart below — representing some of the largest crypto networks — we now have a number of other successful crypto protocols which are growing and generating revenues. This is simply because each one potentially represents a better way forward.
Source: Token Terminal
The way I see it, we now have a number of established and fairly large well-functioning networks that have been tried and tested in real world conditions and which have also recently withstood some pretty significant ‘stress tests’. The rest of what is needed for this technology to become mainstream is pretty standard and not really ‘deep tech’ at all! We primarily need a more user-friendly interface and more appealing applications at this point.
It would take a brave man to bet against the fundamentals here: the sheer number of the best and brightest brains in the world getting involved in making this next — much easier — stage happen is staggering: 30% of MIT graduates are entering the crypto industry for example. What’s more, they are backed by a huge wall of capital to make their innovative ideas into reality!
We are big fans of Bitcoin, it is digital gold, a very secure store of value that definitely has a place in investor portfolios. But if Bitcoin is analogous to gold, then the rest of the sector is analogous to the Nasdaq! The real excitement — and in my mind the real source of superior returns — will come from newer cryptocurrencies where their specific innovation means they are much better suited as a means of transaction in a variety of real world uses.
The truth is that, at this early stage, it’s not clear which protocols will be the ultimate winners. That’s why taking a diversified portfolio approach to the most attractive blockchain protocols is a worthwhile strategy. Like last time, there will be massive winners that will emerge as the industry grows and evolves.
The Long Term Is Still Bright for Crypto
The crypto markets are just brutal right now… And we could be in tough times for the short term as all financial markets get to grips with hawkish monetary policy, weak growth and a myriad of leverage unwinding issues.
But we’re long-term investors, investing in an innovative technology growing closer to mass adoption.
Early investors of tech stalwarts such as Apple and Amazon went through drawdowns of 80% to 90%.
Those losses threw doubt on the idea of those companies as investments… But both continued to innovate and build and are now worth trillions.
Crypto is no different.
It’s been here before, and it’s come back stronger every time to reward those who stuck around.
When crypto goes mainstream, the gains will be massive.
PTLIB is co-founder of Dragonfly Asset Management.
DISCLAIMER: This content is for EDUCATIONAL AND ENTERTAINMENT PURPOSES ONLY and nothing contained in this blog should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
