Market Overview

Can we talk about crypto?

A lot of people stopped paying attention to cryptocurrency in 2018, when bitcoin cratered from almost $20,000 to barely $3,000. They assumed it was about to flatline, sold it for what they could, then got out of the game.

But 2020 has been a different story. Bitcoin – the benchmark cryptocurrency – is up more than 160% year-to-date, in close proximity to where it peaked prior to its 2018 collapse. That’s an incredible surge for any asset class, no less one that didn’t exist a dozen years ago. A bitcoin is essentially a series – a “blockchain” – of electronic signatures testifying to its value; it’s not backed by any company’s or country’s financial might. It’s worth what its holders agree it’s worth and, at the moment, it’s worth a new car.

So let’s assume that it’s too late to get in on the 2020 rally. The fact that it happened suggests it’s likely to happen again. We last covered crypto in this space in April 2018, and a lot of history has been made in the meantime. So, without offering any direct advice about whether or how much to invest in digital coins, let’s restart the discussion.

Fit for purpose

The biggest difference between then and now is that there’s presently more to the crypto market than speculation. That was never supposed to be the driver. If you go back to the asset class’s founding document – the pseudonymous Satoshi white paper – it’s clear that bitcoin was intended as a device to smooth out cross-border payments. That “anarcho-capitalists” would dream of a day when such tokens would replace central bank-issued cash and that high rollers would launch a bidding war for these assets was, in hindsight, predictable.

(When we use the term “bitcoin,” we mean the token with the BTC ticker symbol. There are about half a dozen other forks off the bitcoin blockchain, each with its own symbol, valuation and development team. Unless otherwise specified, we refer to what is more properly called “bitcoin core.”)

With equal predictability, that led to a lot of scams. FOMO – fear of missing out – drove the market. It wasn’t long before the leading programming language for new tokens was PowerPoint and something like 95% of those “initial coin offerings” failed, taking a lot of sucker money with them on the way down.

This new wave of digital coinage, though, stresses functionality over FOMO. One of the most successful digital assets of this past year is Chainlink, which went from $1.78 in January to $13.95 in December. It has an actual purpose – to link the execution of contracts to real-world sensors. If you dabble in agricultural futures, you’ll immediately see the benefit: You can protect yourself from buying bushels of corn unless soil temperature and air humidity readings are within preset parameters.

After hovering between $0.20 and $0.25 for most of 2020, a digital asset called Ripple surged up to $0.64 over the course of a couple days in late November. It intends to disrupt the global SWIFT interbank transfer network by using purportedly more efficient blockchain technology.

One of the criticisms of the crypto space from 2018 is that the price of these assets is so much in flux that it fails as a storage of value. The market has addressed that to some degree in that there are now “stablecoins” – tokens designed to be pegged to that of an underlying asset. These underlying assets are typically but not always currencies, and typically but not always U.S. dollars. Tether and DAI are among the leaders in the stablecoin space but there are many others, and some of them backed by euros or gold or what have you.

Crypto is everywhere

An even bigger change in crypto over the past two years is its availability. It used to be that a relative handful of people were playing in the crypto sandbox, but that’s clearly not the case anymore. Because these accounts – “wallets” in the parlance – are anonymous, and individual holders will have at least one wallet, possibly more, for each ticker symbol, it’s impossible to know how many more market entrants there have been since it began its recovery.

But clearly, it’s a big number. Exchanges such as Coinbase – the premiere U.S.-based source for crypto trading platform – are booming. Nobody who knows is saying how fast they’re growing but, according to one report, Coinbase’s enterprise valuation went from $484 million to $8 billion in roughly one year.

Not that U.S. investors need to go to Coinbase to buy crypto anymore. Upstart online broker Robinhood made a name by offering crypto alongside stocks, all for zero-dollar trading commissions. Others have followed suit.

Meanwhile, PayPal recently got into the act, and you can buy leading digital coins via that ubiquitous online transaction platform. Its competitor Square went so far as to announce a $50 million investment in bitcoin. And Facebook is moving forward with Diem – formerly Libra – which will in essence be the in-game currency for not only Facebook but also Instagram and WhatsApp as soon as January.

Considering the shakiness of much of the rest of the world’s financial system – bonds, oil, precious metals – FOMO is no longer the acronym describing the crypto investment case. It’s TINA. This term has been used to describe why stocks have seemingly defied gravity these past few months, but perhaps its more applicable to crypto. It stands for There Is No Alternative.

Again, we’re not advocating diving into any of this if you’re new to the space. It’s best to consult a financial advisor with any questions about crypto or any other alternative asset classes – or, for that matter any conventional asset classes.