If you haven’t been paying attention to the crypto markets or the financial sections of most major newspapers lately, you have been missing out on what is potentially a legitimate turning point in the history and evolution of cryptocurrencies.
Retail investors and major financial players alike are rushing to get in on what many are touting as the long-awaited rapid growth stage of what has so far been a rather slow-burning macroeconomic revolution. Below are some of the reasons the current crypto-mania is markedly different from any that have come before it.
Increased Institutional Interest
The Bank of Singapore, a private banking segment of OCBC bank, recently stated it believed that cryptocurrencies could soon replace gold as one of the premier stores of value. China’s Central Bank is set to release its own digital currency sometime this year, with a trial run to take place in the form of gifts to its citizens over this Lunar New Year.
Goldman Sachs, JP Morgan and Citi are also looking to enter the cryptocurrency market and are in the process of developing and building out broad digital strategies. The current levels of institutional interest and confidence in cryptocurrencies are indeed unprecedented.
Increased Interest From Big Business
The extent of the involvement and interest from big business also makes the current moment unique. Elon Musk’s Tesla recently invested $1.5 billion in Bitcoin and plans to accept the digital currency as payment sometime in the near future. Microsoft, Starbucks, Whole Foods, Home Depot and a litany of other major companies already accept Bitcoin. Amazon is set to launch its own digital currency very soon in an attempt to compete with Bitcoin.
The bottom line is that the number of corporate mainstays that are putting their money where their mouth is with respect to digital currency payments and investments is much higher than it was only a few years ago.
Macroeconomic Trends and the Search for Stores of Value
There is a marked difference between why investors were looking to cryptocurrencies in the lead up to the previous all-time-high of 2017 and investors’ mindsets in 2021. The economic impact of COVID-19 has seen governments around the world inject massive amounts of money into domestic economies and radically reduce interest rates to keep financial systems from collapsing. This has made investing in savings, bonds and property less attractive, and has pushed the search for viable stores of value elsewhere.
What’s more, a number of so-called “stable coins” are now available with values pegged to central bank currencies (e.g., the USD) and with better wallets that make trading and swapping coins easier.
The technology that supports cryptocurrencies has done a lot of maturing in recent years. One of, if not the biggest issues traditionally associated with digital currencies like Bitcoin has been the computing power and energy required to process transactions and ensure every token is unique and only spent once. The carbon footprint of crypto mining is immense, with that of Bitcoin being compared to the total CO2 emissions of a country like Sri Lanka.
One of the most promising responses to this downside has come from Ethereum, which converted its coin Ether from a “proof of work”-based asset to a “proof of stake”-based one, the former meaning that ownership of a coin is determined by the amount of hardware a person has working versus a randomly-chosen winner based on how much they have staked. The result is dramatically reduced energy needs.
The increased interest from the public and private institutions as well as big businesses is not an illusion. Major developments are underway in the world of cryptocurrencies which seem to indicate the beginning of a genuine turning point in the history of these difficult-to-grasp and often mocked and maligned assets. Anyone claiming that “this time is different” is correct on point of fact, but it remains to be seen whether or not this is yet another cycle or the start of something monumental.