The world is changing fast and to keep up you need local knowledge with global context.
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By David Farelo*
CURRENCY HUB is a crypto advisory supporting crypto arbitrage, OTC and FOREX services. We have prepared a series of educational articles for the BizNews community to ensure they are better informed about the investment opportunities available through cryptocurrencies and blockchain technology.
Bitcoin is currently the most popular cryptocurrency and was one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. It inspired a host of other cryptocurrencies, a type of digital gold rush into alternative investments, and hit the press for both good and bad reasons. It ultimately ushered in the disruptive landscape enabled by blockchain technology and a revolutionary peer-to-peer mindset.
The Bitcoin white paper was released by the founder/s of Bitcoin (Satoshi Nakamoto) and outlined the principles for a cryptographically secure, peer-to-peer electronic payment system designed to be transparent and resistant to censorship. It aimed to put financial control back in the hands of the individual at a time when faith in central banks was beginning to wane. The world was in the grips of a financial crisis fuelled by extensive speculation in the financial markets and banks risking millions of dollars’ worth of depositors’ money.
Bitcoin laid the foundation for what is generally considered to be the first functional digital currency powered by the blockchain, inspiring Ethereum to essentially improve the blockchain with a motivated, digital, peer-to-peer community. Ethereum accounted for significantly more functionality, creating an entirely new financial services landscape referred to as DeFi (Decentralised Finance), driven by smart contracts and data science like the world have never seen. In short, Bitcoin is viewed as a currency and store of value, while Ethereum is all about the technology held together by blockchain and smart contracts.
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By around 2019, on the back of a growing network with greater access to technology and mobile apps (DeFi included), we witnessed the massive adoption of Bitcoin and other crypto assets at a retail level. Bitcoin rose from $2,000 to $20,000 in a matter of months before its downhill slide in late 2017 where it lost half its value and left many doubtful of its future.
2020 ushered in the Coronavirus pandemic and DeFi, thanks to the Ethereum network and community. There was uncertainty across traditional markets following one of the biggest market crashes in history and investors were looking for a safe haven as an alternative to equities, gold and currencies. As the months played out, the US Fed issued a stimulus package three times larger than the previous quantitative easing in 2010 as the dollar came under threat. One out of every three dollars in circulation had been printed in 2020. Think about that for a while and the inflationary impacts over time.
Companies such as Tesla and MicroStrategy rapidly bought up huge reserves of Bitcoin to protect their corporate balance sheets from a devaluing USD currency. The Bitcoin price increase was further boosted when platforms such as PayPal, Square and MasterCard announced they would support cryptocurrencies, giving rise to a massive network effect and accessibility. Shortly thereafter, Wall Street firms, such as Goldman Sachs, Citigroup, BlackRock, Deutsche Bank and local Investec Bank launched crypto services for derivatives, prime broking and custody, while ETF’s (Exchange Traded Funds) also began to appear. In 2020, 87% of Bitcoin investments were from institutional investors, dominated by asset managers who bought the dips when retail investors panicked and lost their nerve.
Bitcoin’s price returned to the $20,000 highs of December 2020 and experienced a meteoric rise to $60,000 over the next few months, with speculations of a valuation of over $100,000 in 2021. Similarly, Ethereum peaked just above $4000, driven largely by the adoption of NFTs (Non-Fungible Tokens), with all cryptos experiencing a massive correction in Q2 2021 of around 40%. Correction or crash … Beginning or end of the (crypto) bull market?
While Bitcoin was initially created to compete against the gold standard and fiat currencies, ubiquitous with traditional finance and investing, it is increasingly being recognised as a store of value and is often referred to as digital gold, with a suggested portfolio allocation of 4% according to the CFA’s Q4 2020 report. Ethereum has also attracted a lot of new investors looking to unlock the value of the technology and DeFi movement, while also serving as a diversifier in an existing crypto portfolio.
Bitcoin and gold share several characteristics, such as value from scarcity – the total amount of Bitcoin still to be issued is pegged at 21 million; the inability to forge it; the ability to divide it up to eight decimal places while maintaining its value; the costs associated with mining Bitcoin and its durability, all of which make it effective for storing value.
While Bitcoin is still a relatively young asset, we expect to see traditional financial institutions treating it more like digital gold going forward, with speculation that Ethereum will outmanoeuvre Bitcoin’s (simple) blockchain and outperform its market cap in the near future.
Look out for the following articles by CURRENCY HUB covering various investment opportunities for individuals and corporations, Bitcoin halving and its deflationary effect.
Disclaimer: This article does not constitute financial advice. While the author and his firms are regulated by the FSCA, cryptocurrencies are not a regulated investment. Please refer to CURRENCY HUB https://currencyhub.co.za/ a juristic representative of BLACK ONYX (FSP 50850) https://blackonyx.co.za/ for more information.
- David Farelo is the Head of Operations & Trading @ CURRENCY HUB.
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