Now is the Time to Consider Crypto
SUMMARY:
- Why cryptocurrency is a unique store of value
- How crypto has become a viable financial asset
- Why the timing is right to take advantage of this opportunity
2020 has been a year of many contrasts
In some ways, it has taken us back in time — a more local lifestyle and days spent with family. In other ways, it has catapulted us into the future — “distanced” working and socializing require a much deeper use and knowledge of technology.
This latter category is the lens through which we can view cryptocurrency (aka “crypto”). Over ten years ago, Bitcoin showed us a path to internet money that spawned an industry. A lot has happened since then. Bitcoin is now an institutionally owned product, while Ethereum is building a crypto-economy backed by tens of billions of dollars of assets.
In short, crypto has become an asset class that merits an allocation in any well-balanced portfolio. The time is now, and here’s why:
1. Crypto is a unique store of value
Given the inflation outlook of 0% interest rates, government stimulus and money printing at an unprecedented rate, owning a store of value or inflation hedge is worthwhile in these markets.
Traditionally, gold and silver occupied the store of value role in a portfolio. But there are two important distinctions we’d like to point out.
First, precious metals are not digital assets; you can’t move them like crypto or the dollars in your online bank account. Second, you don’t know many ounces of the precious metals are out there. With crypto, you have full visibility on outstanding amounts and future inflation.
Crypto incorporates the scarcity of precious metals in a more transparent way and adds the flexibility and ease of use of the internet (i.e., digital dollars).
2. Crypto is becoming a financial asset
In today’s low yield environment, crypto offers an alternative.
At Ether Capital, we are focused on Ethereum and its cryptocurrency Ether, which is a core holding. Later this year, Ethereum undergoes a network upgrade which will allow Ether holders to lock up their Ether and earn a yield akin to dividends or interest.
We wrote a piece explaining this upgrade and what yields one might expect — check it out here. Suffice it to say, Ether’s transition from a commodity to a productive asset is an exciting and much anticipated milestone.
Another important activity we are seeing is on-chain lending and borrowing. On Ethereum you can deposit your Ether into a lending pool on the blockchain itself and earn interest. This is a new trend that is not without its risks, but the potential to pool lending and borrowing liquidity globally is an exciting use case that is uniquely blockchain-enabled.
3. Crypto usage is hitting a tipping point
Recently, usage of the Ethereum crypto network has been at all-time highs.
Source: Etherscan, October 5, 2020.
Much of this activity has been driven by financial applications that have brought tens of billions of dollars worth of assets to the Ethereum blockchain.
Let’s take a look at stablecoins, which are US dollars on the blockchain. They are created when a user deposits US dollars with a custodian (like Coinbase) and that custodian issues US dollar tokens on Ethereum that can be used in the blockchain’s crypto-economy. When that user wants those US dollars back, they can redeem the tokens at any time.
So far this year, approximately US$15 billion of US dollar backed stablecoins have been issued on Ethereum, an eye-popping 400% increase. Network usage and the capital being deployed on Ethereum are very bullish and we suspect this may be the beginning of the tipping point for mass adoption and blockchain valuations in the trillions of dollars.
In conclusion, crypto has come a long way since bitcoin emerged over a decade ago. As an asset class, it has become credible both a unique store of value as well as viable financial asset. It is certainly worth considering as part of any well-balanced portfolio. The time is now!
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