The Emergence of Digital Assets
Understanding the rise of cryptocurrencies and beyond
As digital assets continue to emerge in today’s society, it has become imperative for investors to understand the implications related to the disruptive nature of the technology. From Bitcoin to Ethereum, digital assets — namely cryptocurrencies — present an interesting alternative investment supported by the recent rise in popularity for its underlying technology, blockchain. Many regard blockchain as a revolutionary technology still in its early days of adoption, with cryptocurrency resulting as one of its many use cases. With Bitcoin prices on the rise, let’s go over everything you need to know about digital assets and how they got here today.
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Fire Capital Management is not affiliated with the author and does not guarantee the accuracy of the statements and opinions expressed in this article. The contents of this article are for entertainment purposes only and should not be construed as investment advice.
In this article
- What Are Digital Assets?
- The Rise of Cryptocurrencies
- Market Overview & Dynamics
- Facebook’s Libra
- Conclusion
What Are Digital Assets?
Digital assets mainly refer to cryptocurrencies such as Bitcoin. A Cryptocurrency is a digital or virtual currency that uses cryptography for security. Most cryptocurrencies are based on decentralized systems called blockchains, which are networks made up of “blocks” of digital pieces of information that can be transacted across its nodes. Blockchains are known to be decentralized systems because there is no one central authority governing the network of nodes which transact with each other anonymously. This makes transactions on the network extremely secure, with every computer or “node” in the network verifying each transaction that takes place.
Bitcoin, on the other hand, is the most dominant cryptocurrency that runs on a blockchain network. Bitcoin is mostly purchased through online cryptocurrency exchanges, where it can be stored on online wallets. Some ascribe the value of Bitcoin, and cryptocurrencies altogether, from their ability to serve as an alternative transaction method compared with traditional fiat money. Others view digital assets as a modern way to store value, similar to how investors utilize gold. Government issued tender such as the Dollar or the Pound are known as fiat currencies, which act as the traditional counterpart to digital assets like Bitcoin. Today, there are over 2,000 cryptocurrencies with Bitcoin controlling 65% of the total $312 billion dollar market cap at the time of writing.
Cryptocurrencies are known to be extremely volatile, albeit showing some stability over the past year. In December of 2017, the price of Bitcoin reached an all-time high with a value of just over $20,000. Since then, prices had fallen close to $3,000. Today, the Bitcoin market is going through what many investors say is its bull run, with prices ranging from $9,000 and $13,000 at the time of writing. The high volatility provides an opportunity for massive gains or losses within a much shorter time horizon than most other assets. As the market continues to move, several banking institutions such as Goldman Sachs have hired digital assets teams to research the market while it is still in its early stages.
A cryptocurrency is a virtual asset that runs on a blockchain network, which is a decentralized network of nodes that transact blocks of information between each other. Transacting using a cryptocurrency presents an anonymous, secure, and efficient alternative to traditional fiat currencies like the Dollar and Pound.
The Rise of Cryptocurrencies — A Brief History Lesson
As the cryptocurrency space continues to grow, it’s important to also understand the history leading to its meteoric rise in popularity and relevance.
Bitcoin was created in 2009 by an unknown person using the alias Satoshi Nakamoto. The initial price was set to less than one cent. It wasn’t until 2011 that Bitcoin reached trading parity with the U.S. dollar, exchanging 1 USD/BTC on the Mt. Gox exchange. However, it wasn’t a smooth rise to relevance for Bitcoin, as most news surrounding the currency at the time revolved around cryptocurrency exchange breaches and hacks. Millions of dollars in Bitcoin and other cryptocurrencies were stolen by hackers. These thefts hurt Bitcoin’s value, giving skeptics another reason to bring forward criticism towards digital assets altogether.
As time went on, Bitcoin’s price hovered around $500 to $1,000. In 2016, Barclays became the first major bank to accept Bitcoin, providing a monumental boost towards greater adoption. Bitcoin’s network had also been upgrading over the years to support more transactions than ever before. Yet, at this point opinions regarding digital assets were still all over the place, as adoption was still relatively low and regulatory issues began to emerge.
Since hitting an all-time high of $20,089, the price of Bitcoin has remained subdued hovering around $6,000 in 2018. Thanks to its growing popularity, regulatory issues surrounding Bitcoin became a topic of discussion for many global financial institutions in 2018. This ultimately kept Bitcoin’s price low for the majority of the year, ushering in what many consider to be a “Crypto Winter” where a bear market was in full effect. It wasn’t until June of 2019 that Bitcoin broke out above $10,000 for the first time in over a year. Bitcoin has come a long way since its inception in 2009.
Market Overview & Dynamics
The recent price surge in Bitcoin has allowed it to break out of the bear market that persisted for most of 2018. Advocates of the cryptocurrency regard the recent 30% pullback as being a healthy indicator for a potential bull run to follow.
When compared to other traditional asset classes, Bitcoin has been one of the top performers in 2019. Data from Binance Research reveals that Bitcoin has outperformed and granted higher returns than that of crude oil, domestic & international stocks, real estate, and gold in 2019.
Market Dynamics
So far, institutional investment interest in digital assets has been primarily contained within technology venture circles, although a fair share of larger companies have started to take initial steps into the market.
Facebook’s Libra
Facebook’s recently announced cryptocurrency, Libra, presents the first digital asset to be created by a prominent technology company. Libra is a permissioned cryptocurrency that Facebook plans to roll out across Messenger and WhatsApp starting in 2020, allowing users to anonymously cash it out using their built-in wallet called Calibra. Facebook announced and released its whitepaper, which is an informational report breaking down the Libra protocol before its launch in 2020.
Backed by a basket of conventional currencies to prevent rapid price swings, Libra is also supported through its own Libra Association. This is an independent, not-for-profit membership organization consisting of a diverse coalition of companies including Visa, MasterCard, Uber, Lyft, and Spotify. Founding members also include venture capital firms Andreessen Horowitz and Union Square Ventures, as well as non-profit organizations like Kiva and Mercy Corps. Technically, each member of the organization will run a node on the network to help verify and process transactions, while also giving the entire network a balanced system of governance where Facebook’s vote in the association will carry the same weight as any other member in the association.
One of the underappreciated potential benefits of Libra is to bank the unbanked by creating a global digital currency that could ultimately promote financial inclusion. Just in the US, the number of low-income individuals’ shutout from the banking system has grown dramatically due to rising fees on checking accounts with higher minimums. According to a Federal Deposit Insurance Corporation survey, the number of unbanked households increased by a million between 2009 and 2011. The problem is augmented in countries with less developed banking systems or unstable currencies.
“If more commerce happens, then more small businesses will sell more on and off platform, and they’ll want to buy more ads on the platform so it will be good for our ads business.” — David Marcus, Facebook’s head of Calibra
Although early advocates see potential in Libra as a global driver of commerce, the new cryptocurrency project faces a myriad of regulatory hurdles given its potential as “the most credible crypto threat yet to government-sponsored currencies.” The Federal Reserve, among other global central banks, has already expressed serious concerns about Libra and the credibility of Facebook due to recent and well documented data privacy issues. Libra will need to surmount a mountain of regulatory concerns before fully launching.
With every new cryptocurrency project, there comes its fair share of risks and rewards. Ideally, Libra would become the next evolution of PayPal, while also banking the unbanked. Consumers may find this to be a much simpler and efficient means to transact funds, thanks to fewer fees, less transaction friction, and a decentralized network.
At the same time, it must be understood that new crypto projects are extremely susceptible to failure, as there are over 2,300 active cryptocurrencies on the market. Global consumers may very well ignore Libra as it presents too little reward or reason to switch over to its platform in today’s financial landscape. We’ll just have to wait and observe in the coming months as Facebook completes its launch of what has been a monumental step forward for cryptocurrency usage.
Facebook’s Libra presents a promising first step towards global adoption in the eyes of cryptocurrency investors, while others including the US Senate Banking Committee have issued a wave of skepticism over the viability of the project. Some have pointed to Facebook’s history of violating privacy boundaries as a reason to not trust the platform at all, contradicting the company’s plans to help increase financial inclusion with what might just be the next evolution of Paypal.
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Conclusion
Digital assets have grown immensely over the past few years, essentially forcing investors to at least acknowledge its existence and market. While many skeptics and enthusiasts alike have debated on whether or not the future of finance has room for a new age of transacting, we’ll just have to wait and see how consumers around the world react to these projects.
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Sumesh Rawal is a student at UC Berkeley studying economics. Sumesh was selected as a Top Writer on Medium for #investing and #cryptocurrency (2018) and has written over 100 articles on the digital assets sector of investment spending. He is currently an investment communications intern at Fire Capital Management. Read his previous articles and follow Sumesh on Medium & LinkedIn.
Fire Capital Management is not affiliated with the author and does not guarantee the accuracy of the statements and opinions expressed in this article. The contents of this article are for entertainment purposes only and should not be construed as investment advice.
