The Long-Term Potential of Cryptocurrencies
Note: All data in this section updated as of March 30th, 2022
While pundits have long compared the rise of cryptocurrencies to the infamous ‘Tulip Bubble’ that gripped Amsterdam in the early 1600s, I think we’re well beyond that point.
Bitcoin has Lasted Over 4x Longer Than Comparative “Bubbles”
Bubbles don’t pop and form again, and the Bitcoin “run” has lasted significantly longer than either tulips or the South Sea Company (where Issac Newton famously lost more than $3 million in today’s money)
Indeed, cryptocurrencies have survived on merit, and one could argue that they’re the best form of money that the world has ever known.
The Best form of Money the World Has Ever Seen
If we were to use the six properties of money discussed earlier to compare cryptocurrencies to the USD and gold, we would see that they stand head-and-shoulders above in almost all areas.
Strengths and Weaknesses of Gold vs. USD vs. Bitcoin as a Form of Money
The only area where crypto falls short is the fact that it’s not widely accepted. But adoption has been steadily increasing now, and we may soon see a “tipping point”. According to Zippia:
Over 15K businesses worldwide accept Bitcoin, including Microsoft, PayPal, Whole Foods, Etsy, Home Depo, AMC Theatres and Starbucks
36% of small and midsize businesses in the US accept cryptocurrency
There are over 35K Bitcoin ATMs in the US
In addition, El Salvador became the first country to accept Bitcoin as legal tender in 2021 and several researchers argue that Panama, Cuba, Ukraine and Paraguay may soon follow suit.
Stoking the Fires of Disruption
In addition to being a better form of money, cryptocurrencies are leading to revolutions in several other related spheres including:
Digital Gold: Gold has long been sought out as both an inflation hedge and seizure-resistant asset (small amounts of it at least). Bitcoin offers all the benefits of gold with two major advantages – it’s infinitely divisible and internationally portable. This could benefit numerous parties, including the super-wealthy who want to replace their Swiss bank accounts, those in developing countries who need an inflation hedge but can’t access gold and anyone who wants to avoid the cost and restrictive nature of sending money abroad. As such:
Digital Gold could replace fiat currencies and central banks (e.g the USD, Euro, British Pound, RMB, Yen, the Fed, Bundesbank, Bank of England and IMF)
Decentralized Finance: Cryptocurrencies, especially stablecoins, are already creating an entirely new financial infrastructure known as decentralized finance (“DeFi”). DeFi offers many of the same features as the traditional financial ecosystem, such as i) lending and borrowing, ii) asset trading, iii) derivatives and iv) insurance without relying on the banks. This eliminates unnecessarily high fees, onerous KYC requirements and the threat of seizure and gives the almost 2 billion unbanked people access to basic financial services. Decentralized Finance could replace Wall Street (e.g. Goldman Sachs, Morgan Stanley, Bank of America, Chase, Fidelity, the New York Stock Exchange)
Web3: Cryptocurrencies such as Ethereum have the potential to form the basis for a new, “internet-first” economy – one owned by it’s users instead of global mega-corporations. We are already seeing the beginning phases of several new industries enabled by blockchain technology such as NFTs, Play-to-Earn Games, the Metaverse and DAOs. In many of these ecosystems, cryptocurrencies are the dominant form of money. As such:
Web3 could replace Silicon Valley and Wall Street (e.g. Microsoft, Amazon, Apple, Facebook, Netflix, Spotify, Disney, Activision, Warner Music, Google)
Given the enormous potential of cryptocurrencies, it’s not surprising that many analysts believe that the market could still grow by orders of magnitude.
Quantifying the Potential Value of Cryptocurrencies
While it’s difficult to put a number on disruption, when we compare cryptocurrencies to the market cap of gold, global equities, global currency, bonds and real estate, we can see that there is still significant room for appreciation.
Cryptocurrencies Represent a Fraction of Global Asset Values
Perhaps it’s for this reason that we’ve seen some mind-blowing predictions for the future value of Bitcoin, Ethereum and several stablecoins:
The Stablecoin market could grow 1,000x: While this prediction from Jeremy Allaire, the founder and CEO of Circle (the company behind USDC) is both aggressive and probably a bit biased, there is at least some merit to the logic. Allaire argues that the minimum TAM for stablecoins is $120T (the global value of M2 currency) and that the technology’s advantages over conventional money may ultimately grow the market (a la Uber). While achieving 100% market penetration is unlikely, this prediction nonetheless helps make the case that stablecoins likely have a lot of room to grow from their current market cap of $180B.
Bitcoin could be worth $1M per BTC: Ark Invest, the $50B fund founded by Cathie Wood, believes that a single Bitcoin could be worth $1 million by 2030. She reasons that the currency could capture up to 50% of global remittance payments, 10% of M2 in emerging markets, 25% of US bank settlement volumes, 1% of total national reserves, 5% of the treasuries of S&P 500 companies, 5% of global HNWI wealth, ~3% of the institutional asset base and 50% of gold’s total market cap.
Ethereum could hit a $20T market cap: Ethereum has started to see legitimate traction as “money”. It’s the preferred collateral in DeFi, the unit of account in NFT marketplaces and likely currency of Web3. As such, Ark believes it could capture 15%-20% of the global M2 supply over the next ten years. This would equate to almost $170K per ETH, an >60x increase over the time of writing.
Wherever the future takes us, it’s important to watch as it has the potential to be both an existential to the existing system and a road to almost unlimited potential for investors.
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