What's Going On With Cryptocurrency?

After nearly three years since Bitcoin saw its previous high of just under $20,000 USD per coin and after two years of not hearing much about cryptocurrency on a daily basis, the fourth quarter of 2020 saw a relative explosion in cryptocurrency markets, including the stalwarts Bitcoin (BTC) and Ethereum (ETH). After the 2017 all-time highs, Bitcoin and other coins seemed to slowly fade out. Some financial analysts enjoyed comparing cryptocurrencies to other famous bubbles, most notably the Tulip bubble from the late 1700s in Amsterdam. In that example, the price far exceeded the value, and when the price massively crashed, it never bounced back up. People said, “Hey at least you have a tulip out of the deal”. The comment today is “If crypto goes to zero, you won’t even have a tulip.”

As of January 6, 2021, the global value for all cryptocurrencies (in US dollars) combined just surpassed $1 trillion dollars. Cryptocurrencies are not going away, and it’s not just due to the significant amount of investments people have in coins but rather due to the underlying technology that created the coin system; Blockchain.

Cryptocurrency doesn’t exist without Blockchain technology. Coins are a by-product of the underlying Blockchain technology. Blockchain is a technology that can record transactions or other information across several computers using peer-to-peer networks. So, if the coins existed, Blockchain tech existed, what changed between 2017 and the end of 2020 that caused the crypto markets to reawaken?

A lot.

Cryptocurrencies are still volatile. There have been major swings, up and down, over the last 11 years including the infamous crash following the end of 2017 where Bitcoin, the oldest of the cryptocurrencies, peaked at $19,800 per coin. Over the next few months, the price of one Bitcoin (BTC) bottomed out near $7,000 per coin. Doomsayers predicted it would go to zero like the “tulip bulbs”. Those experienced with cryptocurrency knew it was simply another in a series of volatile swings. With more than one trillion dollars in play around the world, cryptocurrencies are not going away.

While cryptos had bottomed out in 2018-2019 and waned from the general public’s eye, three other major developments happened. First has been the arrival of institutional money into cryptocurrencies. These investments materialized in the form of Bitcoin Futures and various Blockchain Exchange Traded Funds (ETFs). There has also been a rise in cryptocurrency asset managers and various funds that are including cryptocurrencies as an asset class. These moves indicate the arrival of cryptocurrency into the mainstream of investment culture. You can even buy Bitcoin at the Coinstar change machines in grocery stores or on PayPal now. It is becoming mainstream.

The second major development is happening on the other side of the crypto equation and deals with the innovations and improvements to Blockchain technology. The Bitcoin Blockchain was a glorified proof of concept and works great as a store of value. It’s often referred to as “Digital Gold”. Its functions are a great way to deliver cross-border payments and basic peer-to-peer payments. That was first-generation Blockchain tech. Second-generation Blockchain technology can be evidenced by examining the other common name in crypto, Ethereum (ETH). If Bitcoin is “Digital Gold”, then Ethereum (ETH) can be considered “Digital Oil”. It didn’t just improve on the BTC Blockchain; it introduced an entirely new ecosystem. Ethereum is a Blockchain protocol that has allowed other more sophisticated applications to be built on top of it. Plainly, think about how Apple has a mobile operating system on which developers can build applications. Ethereum is the same way; it also introduced the idea of Smart Contracts. While Bitcoin serves as a way to transfer money between parties, it wasn’t helpful if there were terms or conditions between the transferring parties. Smart Contracts are contracts that can “self-execute” on Blockchain based on the completion of terms and conditions between two parties, for example between buyers and sellers. Smart Contracts are being used for things like real estate transactions, identity management, and transferring ownership. Innovation like this is bringing Blockchain into real work applications.

Finally, and closely related to the 2nd point, has been the rise of “DeFi” or “Decentralized Finance” applications. The “DeFi” apps will revolutionize the finance industry. “DeFi” applications are built on the Ethereum protocols, but the applications have very different functions. These functions are potentially disruptive to the financial services industry. Normally, it has been the responsibility of the financial institution to monitor, validate, and store records of transactions on private ledgers. With "DeFi" applications on the Blockchain, all of those functions, including other applications like lending and credit, can be done in a highly decentralized way using distributed ledger systems. “DeFi” will disrupt financial intermediaries, like banks, brokerages, and trust companies with Smart Contracts, lending, and cross border payments. This has sparked a rush by major financial institutions to invest heavily in Blockchain tech so they can figure out how to adapt for their institution before they are massively disrupted. At the end of January, the CEO of Visa announced that they will be adding Cryptocurrency “wallets” to their services. This means anyone with Visa cards will be able to use cryptocurrency for transactions.

So, innovations in Blockchain, the creation of ecosystems for sophisticated, self-executing Smart Contracts and Decentralized Finance applications, and the arrival of institutional investors into cryptocurrency are all driving factors for the recent and current increased activity and all-time highs in the crypto markets. As with any market, there will be volatility. Cryptocurrencies will always be more volatile due to their bi-polar function of trying to be a store of value, a vehicle for exchange of currency, and potentially even as a security.

Cryptocurrencies will still see wild swings on the various exchanges in which they are traded. But with more than a trillion dollars in combined value, Crypto and Blockchain are here to stay. Markets will always create bubbles and investors should be cautious, but Blockchain technology is the future of the web and not going anywhere anytime soon.

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