Crypto Assets: why you should consider investing in them today
By OSOM finance on The Capital
In our previous article, we discussed how the response to the COVID-19 pandemic and the measures governments are taking to stimulate economies are probably going to substantially dilute your savings. As we promised there, we will now review the possibilities you may consider for mitigating this issue. We will begin the series with a look at crypto assets.
Crypto assets: what are they?
Crypto assets sound exotic, but they are actually based on a principle not that different from how the money is held on your bank account or the way, for instance, corporate shares are traded today. Those “things” exist essentially as entries in databases. However, banks or stockbrokers have databases that are under centralized control. In other words, some identifiable organizations determine what the content of the database is, who has what amounts of money or assets next to their name, and so on. Any transactions with the traditional money or financial assets have to pass through such intermediaries. See our YouTube video on what blockchains are here.
Blockchain technology, where it is public, changes this core element. A blockchain is, at heart, a decentralized database maintained by nodes that do not need anyone’s permission to maintain it. Furthermore, anyone who so desires can create a cryptographically secured account (public address) on a public blockchain and send and receive transactions peer-to-peer, that is, without intermediaries.
Other cryptographic mechanisms and carefully designed incentives ensure that it is extremely difficult and unattractive for the nodes that maintain public blockchains to tamper with the incoming and past transactions and people’s asset holdings. Thus, for all intents and purposes, blockchains are immutable ledgers of transactions with which everyone can interact.
Brief historical overview of crypto assets
Crypto assets were born in 2009 with the appearance of Bitcoin blockchain and the namesake cryptocurrency (BTC). While initially, there was no trading, people then discovered that there was demand for buying and selling BTC. Cryptocurrency exchanges were born, and the explosive growth in BTC prices, among other reasons, motivated other researchers and developers to launch other blockchain projects and cryptocurrencies.
The Ethereum project that launched in 2015 took the blockchain and crypto asset vision much further. Using smart contracts, it made it possible for projects to create crypto assets not just for blockchains but for applications built on top of them.
This opened, between 2016 and 2018, the era of utility tokens and their public offerings (called initial coin offerings, or ICOs) for projects such as Augur and Gnosis (decentralized prediction markets), Golem and iExec (distributed computing), Basic Attention Token (personalized online advertising), MakerDAO (a platform for programmatic stablecoins) and many others.
Finally, a range of smart contract platform projects emerged trying to improve upon Ethereum. Projects building on top of them is also starting to issue tokens on those blockchains. This has rapidly created a growing financial ecosystem with thousands of assets.
This ecosystem and the related infrastructure are also maturing rapidly, even if not without major hiccups. There are currently scores of major cryptocurrency exchanges, crypto asset data tracking platforms, services for asset custody, saving and lending in crypto assets, and so on.
The crypto space undoubtedly has a huge transformative potential in many industries from traditional finance to the sharing economy, from cloud computing and storage to the Internet of Things, and so on. For a nice short talk on the promise of blockchain/crypto technologies see this TED talk by Charles Hoskinson.
How have crypto assets performed compared to some other financial instruments?
The question that you probably have in mind now is how crypto assets have performed historically compared to other investment alternatives. They were initially a completely insignificant niche, but the sudden attention they attracted in late 2017 led to a massive upswing in their prices all over the board and briefly grabbed the attention of the whole world.
Since then, the total market capitalization of crypto assets has decreased by around three fourths from its peak. It has also been fluctuating a lot since then. However, if we compare the performance of crypto assets to the major financial indices since December 15, 2019 (just before the current pandemic became public), we shall see that the total market cap of crypto assets has tended to outperform them.
Between that date and today, it has stayed essentially flat (with a lot of fluctuation in between).
Meanwhile, all the major stock market indices that we studied (e.g. S&P 500, DJIA, Euro Stoxx 50, FTSE China A50) have undergone significant declines.
The better performance of crypto assets so far may be due to the perceived lesser dependence of crypto projects on fiat money issuance, and even the expectation that many crypto assets would be used as a hedge against inflation. Crypto projects are also less impacted by forced physical distancing, as most of them can continue being implemented by people working remotely.
At the same time, we have to note that some investment types have performed better than the crypto market cap. The most obvious such example is gold whose price per ounce has actually grown from around $1327 to around $1566 (an 18% increase between December 15, 2019, and today).
A note of caution
With all the positive things we said about crypto assets in this article, a few important caveats are in order.
First, crypto assets and their underlying technologies are still relatively new, and they have been developed very fast. It is still possible that there is some fundamental flaw with blockchain technology that will ultimately render the whole crypto asset vision unrealizable. One risk, although rather unlikely, comes from the fact that quantum computers could soon break the encryption schemes securing the blockchains, but there is already work underway on quantum-resistant cryptography.
Moreover, despite the encouraging maturation of the crypto ecosystem, the quality of crypto asset markets still leaves much to be desired. There are not enough institutional and qualified investors involved in trading, many exchanges exhibit dubious trading patterns and probably falsify volumes. Pump and dump schemes still work, and so on.
Also, in the crypto space, there are a lot of projects that are either of poor quality, too ambitious, with poor market fit, or even outright fraudulent (scams). Such projects’ crypto assets can still often perform well on the market because of aggressive marketing and overpromising. A lot of care should be taken to distinguish the projects worthy of attention from distractions.
The regulatory situation with regard to crypto assets is not completely rosy, either. They have been mostly developing somewhat orthogonally to the existing legal systems whose creators could never have imagined them. This creates risks of conflicts with governments, some of which have already materialized.
Last but not least, so far, none of the blockchain platforms or decentralized applications have achieved mass adoption. Part of this is quite probably because of regulatory difficulties. But some of it is probably because there are some costs and complexities inherent in these tools that make them not obviously useful or too exotic to many people and organizations. A lot of work remains in this regard.
The Covid-19 pandemic and the response to it have put people’s savings under significant threat from inflationary dilution. If you are willing to try to protect your hard-earned money against this threat, you might want to consider crypto assets as a means to protect against inflation. They have performed relatively decently lately compared to some major other asset classes. While assets like gold are probably a better short-term hedge against inflation, crypto assets may have better future growth potential than those as they relate to cutting-edge projects.
That said, while crypto assets and their underlying projects present an exciting promise, any future profits from investing into them are highly uncertain, and the crypto space faces significant risks. We encourage you to do your own research before investing into anything.
Legal disclaimer: The content of OSOM blog and associated content distribution outlets (social media accounts, platforms, and sites) is not investment advice, nor should it be construed as such. Our content is only intended for information purposes. Before making any investment decisions, we recommend that you seek advice from a duly licensed professional.
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Sincerely yours,
OSOM team
