Chapter 16: Crypto as a Store of Value – A New Investment Era?

The crypto market has grown a lot, reaching over $1.7 trillion by March 2021. It’s still smaller than traditional assets like real estate and stocks. But Bitcoin alone is worth about $1 trillion, making up 60% of all cryptocurrencies. Yet, the market is not very liquid, with only a tiny part of the Bitcoin traded daily.

This shows if major cryptocurrencies can be seen as a lasting asset class.

Cryptocurrencies are becoming a store of value, digital currency, and decentralized finance. This has started a new investment era. People are looking into blockchain technology and cryptocurrency investment. They see it as a way to hedge against inflation, diversify their portfolios, and get into a new alternative asset class. With more people using cryptocurrencies, keeping these digital assets safe for the long-term is key.

Key Takeaways

The cryptocurrency market has experienced significant growth, with a market capitalization exceeding $1.7 trillion as of March 2021.
Bitcoin accounts for approximately $1 trillion of the total cryptocurrency market cap, representing 60% of all cryptocurrencies.
The liquidity of the crypto market remains relatively low, with the average number of Bitcoins exchanged daily equivalent to less than 0.05% of outstanding Japanese Yen and 0.06% of outstanding British Pound.
Cryptocurrencies are being explored as a new investment asset class for portfolio diversification and inflation hedging.
The ability to securely store and hold cryptocurrencies for the long-term has become increasingly important as the adoption of these digital assets continues to grow.

Introduction to Cryptocurrencies as a Store of Value

Cryptocurrencies have changed the finance world, offering a new way to invest. With Bitcoin’s market value over $1 trillion, people wonder if they can be a reliable store of value. This is similar to traditional assets like gold.

Market Capitalization and Liquidity of Major Cryptocurrencies

The crypto market is big but has ups and downs in value and trading. Bitcoin, the biggest one, is worth about $1 trillion. Yet, its daily trading is tiny compared to big currencies like the Japanese Yen or the British Pound. Other big names like Ethereum and Cardano have even smaller values and trade less often.

Defining Asset Classes: Capital Assets, Consumable Assets, and Store of Value Assets

Assets are grouped into three main types: capital, consumable, and store of value. Capital assets like stocks and real estate make money for their owners. Consumable assets, like food and metals, are used or changed into something else. Store of value assets, like gold and cash, keep their value over time.

Cryptocurrencies are big but trade less often, making them a new kind of store of value. But, their special features like blockchain technology might make them a unique asset class.

Asset Class	Description	Examples
Capital Assets	Generate income streams for the owner	Equities, bonds, real estate
Consumable/Transformable Assets	Provide economic value through consumption or transformation	Physical commodities, precious metals
Store of Value Assets	Retain their worth over time	Precious metals, fiat currencies

“Cryptocurrencies, due to their significant market cap and low liquidity levels, could potentially be considered a new store of value asset class, but their unique characteristics also suggest they may constitute a new asset class altogether.”

Crypto as a Store of Value: A New Investment Era

Cryptocurrencies, especially Bitcoin, are seen as a new way to save money. Most people keep their crypto for a long time, showing they see it as a valuable asset. Experts say it’s a new type of asset because it has unique traits like being investable and having a special economic profile.

Adding crypto to traditional investments like stocks, bonds, and real estate can make portfolios better. Bitcoin is special because it can only be 21 million, making it very rare. This makes it a great alternative asset class for investors.

Gold also has a low inflation rate, making it rare. Bitcoin can be split into tiny parts, making it easy for everyday use. Unlike fiat money, which loses value over time, Bitcoin keeps its worth.

The US Dollar is a top choice for international payments. Gold has been a reliable store of value for thousands of years. Bitcoin has also shown it can hold its value well over the past 12 years.

The Lightning Network makes bitcoin transactions fast and cheap, making it a strong competitor to traditional money. While fiat money is easy to split digitally, it loses its value over time. Bitcoin is accepted worldwide, showing its global appeal.

Bitcoin is seen as a unique asset with growth patterns like a new technology and supply like gold. Investing in Bitcoin looks at factors like size, source, and managing risks carefully.

A plan for investing in Bitcoin suggests different percentages for different ages. Fidelity sees digital assets as part of alternative investments for when traditional portfolios don’t work well.

Traditional 60/40 portfolios could add Bitcoin as an alternative to gold in times of high inflation and volatility. The launch of Bitcoin ETPs in the US could make it easier for investors to get into the digital asset market.

Characteristics Distinguishing Cryptocurrencies from Traditional Asset Classes

Cryptocurrencies stand out because of their investability. They’ve grown more liquid over time, making it easier for people to get into them. Now, buying and trading cryptocurrencies is simpler, often without the strict rules that traditional assets face.

They also have a unique politico-economic profile. Built on blockchain technology, they run on a decentralized model. This is a big change from the old, centralized financial systems. This setup can offer more transparency and security than traditional assets.

With better investability and a special governance model, cryptocurrencies seem to be a new asset class. As they keep growing, these traits will likely play a big role in how investors pick where to put their money.

Characteristic	Description
Crypto Investability	Improved accessibility and liquidity, independent of regulation and capital controls
Crypto Decentralized Governance	Innovative blockchain technology enabling transparent, secure, and decentralized operations

“Cryptocurrencies have the potential to fundamentally reshape the global financial system, challenging traditional asset classes and presenting new investment opportunities.”

Valuation Models for Cryptocurrencies

The cryptocurrency market has grown fast, now worth over $1 trillion. Many valuation models have been created to figure out the true value of cryptocurrencies. Each model looks at things differently, using its own set of assumptions and methods.

The “Store of Value” Framework

This framework thinks that cryptocurrencies like Bitcoin could replace gold as a long-term investment. It believes that as more people use cryptocurrencies, their value will go up. This could make their market value as big as gold’s, which is about $8 trillion.

The “Token Velocity Thesis”

The “token velocity thesis” says how fast tokens are traded affects their long-term value. If tokens are not being traded much, they might be worth more. This idea looks at how tokens are used in the ecosystem and how often they are traded.

The “INET & Crypto J-Curve Thesis” Framework

This framework is for utility tokens and looks at things like how many tokens are out there, their current value, and how many people will use them. It says the value of these tokens will go through a J-curve, starting low and then rising fast as more people start using the network.

The “Network Value to Transaction (NVT) Ratio”

The “Network Value to Transaction (NVT) Ratio” compares the value of a cryptocurrency’s network to how often it’s used. A high NVT ratio means the network might be overvalued, while a low ratio could mean it’s undervalued. This helps us understand the health and use of the cryptocurrency network.

Each valuation model gives a different view on how cryptocurrencies could be valued. They look at things like being a store of value, how fast tokens are traded, network effects, and transaction volume. As the crypto world keeps changing, using and improving these models will be key for investors and analysts to understand the value of cryptocurrencies.

Factors Driving Investor Interest in Bitcoin and Cryptocurrencies

Global inflation, geopolitical tensions, and financial worries after COVID-19 have made investors look at Bitcoin and cryptocurrencies more closely. The growth of a strong ecosystem, like better trading platforms and security, has also made digital assets more appealing to big investors.

Global Forces: Inflation, Geopolitics, and Financial Concerns

High inflation has pushed investors to find new assets to protect their money. Bitcoin, with only 21 million coins, is seen as a good option. It’s not affected by the same issues as regular money.

Geopolitical issues and banking problems after the pandemic have made investors look at cryptocurrencies. They like how these assets are not tied to any country and are secure.

Development of Ecosystem Infrastructure

The crypto world has grown up, offering easy-to-use exchanges and safe digital wallets. This has made it easier for both regular and big investors to get into digital assets. It has also made them feel safer about their investments.

Regulatory Evolution and Oversight

Policymakers are working on rules for cryptocurrencies, which is making investors more confident. Even though rules are still changing, the progress has made investing in cryptocurrencies less risky.

These factors – global economic issues, better ecosystem support, and clearer rules – have made more people interested in Bitcoin and cryptocurrencies. They see these assets as a good choice for investing now.

Cryptocurrency	Price Change (Last 7 Days)	3-Month Performance	Technical Rating
Bitcoin	1.30% increase	66.45% increase	Very bullish
Ethereum	0.90% decrease	73.69% increase	Very bullish
Tether	0.05% increase	0.87% decrease	Neutral
Binance Coin	0.50% decrease	N/A	Very bullish
Solana	N/A	N/A	N/A

The data shows how major cryptocurrencies have done recently and their technical ratings. It highlights the market’s ups and downs and the chance for growth in this new asset class.

Comparing Cryptocurrencies to Traditional Stores of Value

Investors are looking at cryptocurrencies as an alternative to traditional assets like gold, fiat currency, and real estate. These assets all help keep wealth safe, but cryptocurrencies like Bitcoin have their own special qualities. They stand out from the usual options.

Cryptocurrencies are unique because they have a limited supply. For example, only 21 million Bitcoins will ever exist. This makes them rare and potentially valuable. They can also be split into smaller parts, making them easier to use than traditional money.

Asset	Distinctive Features	Potential Advantages
Cryptocurrencies (e.g., Bitcoin)	Finite supply High divisibility Decentralized governance Blockchain technology	Scarcity and potential for value appreciation Ease of cross-border transactions Resistance to censorship and control by centralized authorities Transparent transaction history and traceability
Gold	Finite physical supply Long-standing tradition as a store of value Tangible asset	Proven track record as a store of value Perceived as a hedge against inflation Diversification benefits in investment portfolios
Fiat Currencies	Backed by governments and central banks Used as a medium of exchange Susceptible to inflation	Widely accepted and recognized globally Ease of use in everyday transactions Familiarity and trust among the general public
Real Estate	Tangible, physical assets Limited supply in desirable locations Potential for capital appreciation	Hedge against inflation Stable long-term investments Opportunities for rental income

The table shows that each asset has its own benefits for keeping wealth safe. The debate between crypto vs. traditional stores of value has brought a new option to the table. This option is different from gold, fiat currency, and real estate.

Conclusion

Cryptocurrencies are growing fast and becoming more important in the financial world. They are led by Bitcoin and other big digital assets. These assets have a big market value but are not very liquid. This makes people wonder if they are a new kind of asset or just a temporary thing.

Cryptocurrencies have unique traits that make them stand out. They are investable, have a special economic profile, and offer a unique risk and return balance. This suggests they might be a new asset class. The article talks about how to value these digital assets and how global trends, infrastructure growth, and changing laws are making investors interested in them.

As more people start using cryptocurrencies, their role in storing value and their effect on investments will be closely watched. The article’s main points show how cryptocurrencies could change the way we invest. They might change traditional investment plans and how we think about keeping wealth safe.

FAQ

What is the current market capitalization of the cryptocurrency market?

The cryptocurrency market has grown a lot, with a value over $1.7 trillion as of March 2021. Bitcoin alone is worth about $1 trillion, making up 60% of all cryptocurrencies.

How do the liquidity levels of major cryptocurrencies compare to traditional asset classes?

The crypto market is still quite small, with daily trades in Bitcoins less than 0.05% of Japan’s money supply and 0.06% of the UK’s. This shows the market is still growing and its stability is uncertain.

How are cryptocurrencies classified as an asset class?

Cryptocurrencies have a big market value but are still not very liquid. They could be seen as a new type of asset class. Their unique features suggest they might be a class on their own.

What are the unique characteristics of cryptocurrencies that distinguish them from traditional asset classes?

Cryptocurrencies stand out because they can be invested in, thanks to blockchain technology and decentralized control. They don’t move with other assets much and have a unique risk and reward balance.

What are some of the valuation models used to determine the value of cryptocurrencies?

There are several ways to value cryptocurrencies, like the “store of value” model, the “token velocity thesis,” and the “INET & Crypto J-Curve Thesis.” Each method gives a different view on how valuable cryptocurrencies could be.

What factors are driving investor interest in Bitcoin and cryptocurrencies?

Investors are interested because of rising inflation, political issues, and banking worries after COVID-19. Better infrastructure and changing laws have also made digital assets more appealing.

How do cryptocurrencies compare to traditional stores of value, such as gold, fiat currencies, and real estate?

Cryptocurrencies are like traditional values in storing wealth but are different because of their decentralized control and blockchain tech. They could become a new reliable way to save money.