This Time, It's Different

Joel John

In 2017, many suggested that holding cryptocurrencies even as valuations soared beyond reason could be just a pathway to personal wealth creation. 2018 showed us that it might not have been the case. Discounting the fact that Bitcoin is barely 20% away from its all-time high, there is a sea of altcoins that will likely never recover much like there were dot-com era equities that never recovered. As we wait at the cusp of what seems like yet another bull market, it is only fair that investors wonder if anything could be different this time. The signs are becoming increasingly clear that the market structure we are dealing with in 2020 is fundamentally different from the one we saw in 2017. As an asset class, digital assets like Bitcoin have a different risk profile than earlier cycles. I explore why this is the case based on user behavior, experience, and the macro-economic landscape.

According to Glassnode, the number of wallets with non-zero balances today is at its peak at 32.75 million wallets. In January 2018, the peak for the same metric was at around 27.5 million wallets. There are more wallets holding exposure to Bitcoin today than there ever has been. The trend is similar in larger wallets with more than 1 Bitcoin in balance which stands at an all-time high of 1.82 million wallets. Apps like Cash by Square are making it increasingly easier for small-ticket retail users to have exposure to the asset class. The surge in interest is also seen by Greyscale in their ETF product also indicates larger asset managers exploring options for exposure to the industry today. To me, this is a sign that Bitcoin has come far from the days of wiring money to a little-known exchange in Japan (MT. Gox) and hoping the cash arrives before prices shoot up. Add that to a year marred by lock-downs, lay-offs, stimulus checks, and inflation, and we will begin to see Bitcoin’s appeal to the average individual.

Data source : Santiment.

The application layer on Ethereum has also substantially evolved over the years. In 2017, Ethereum’s key use-case was for issuing tokens. It paved the way for an ICO frenzy that raised $8 billion. In comparison, there is an entire financial suite on Ethereum today. Over $22 billion in supply exists on stablecoins alone. Collectively, they have enabled transactions worth $687 billion on-chain. Lending, derivatives, stable-payments, and insurance are now possible on Ethereum. Governments like Australia’s are now exploring launching a Central Bank issued digital currency on Ethereum. This evolution is not endemic to financial applications and traders alone. Trends like social tokens and NFTs are pathways that plug into the broader development of the web and is likely how this ecosystem will go from being mere “toys” to critical infrastructure for the internet. It is also worth noting that blockchain-based applications like Stablecoins are now able to offer a far superior experience than banks in terms of accessibility and cost. This creates a flywheel that on-boards users and keeps them retained without the speculatory aspects that lead to unsustainable price action in the past.

Lastly, public sentiment and perception have also been changing around digital assets. India reversed its Ban on banks enabling cryptocurrency exchanges to onboard retail investors in Q1 this year. Iran recently explored the use of Bitcoin to circumvent sanctions against the country. U.S. regulators now permit banks to be custodians of digital assets. This change in perception is what makes Bitcoin and digital assets in general from the purview of the few to a mainstream asset. Bitcoin is no longer a “new” technology, unlike 2013 and 2017. This is evident once we see how large institutions have been positioning themselves. Square, Paypal, Fidelity, JP Morgan, and MicroStrategy are just a handful of publicly listed firms with direct exposure to the digital asset ecosystem today. Educators and regulators have steadily been educated. Nations around the globe will have to play catch-up to one another as they compete on attracting talent and capital from the industry. This “edge” in regulators being proactive is evident when we consider the number of blockchain deals that occur in the United States versus other parts of the world. Another instance of this happening is Bermuda’s increasing focus on creating a regulatory framework for stablecoins.

It used to be “weird” to enter a stranger’s car and meet individuals one did not know in real life during the early 2000s. And yet, here we are doing the same with cab-rides and dating apps. It takes time for one’s perception of money to change. We witnessed that once in the past when we considered switching from physical notes to digital money. Perception shifts, the pace of narratives spreading, and behavioral changes are what drives assets. In writing this, I don’t mean to imply that we are far from the era of exuberance. As interest in digital assets increases, we will see heightened volatility, and people will lose money as with all speculatory manias. It is still a possibility that we never return to the yearly lows of being in the $3000 range much like how we never returned to the lows of 2017 at $1000 ever since the rally. Change often happens gradually, then suddenly. When it occurs, it may help to observe how the variables in the environment we are in are changing. As we enter Bitcoin’s 12th year, it is important to note that the phase where the proof of this system “working” is here already. It is now upon the ones who dissuade to prove over time that a peer-to-peer, decentralized form of money with a predefined deflationary monetary system cannot function at scale.

Disclaimer: The opinion shared above is that of Joel John and does not represent that of LedgerPrime as an organization.

Author: Joel John, Analyst at LedgerPrime

Bio: Joel John has been a blockchain analyst focused on early-stage investments since 2017. He primarily focuses on the use of blockchains to expand or enable financial services. Joel is currently engaged by LedgerPrime to oversee investments into DeFi. You can follow his substack here.