Cryptos vs. Traditional Currencies

A cryptocurrency is a digital currency where transactions are verified, and records maintained by a decentralized system using cryptography. Cryptography is the process of hiding or coding information so that only the person a message was intended for can read the message. The art of cryptography is not new, as it has been used to code messages for thousands of years. However, computer technology has advanced cryptography, increasing security. Cryptocurrencies transcend borders and are a new means of exchange. Bitcoin, the leading crypto and grandfather of the asset class, has only been around since 2010 when the price was as low as five cents per token. Its limited supply, global applications, anonymity, and rising acceptance caused the price to explode to over $56,000 per token in September 2024. While Bitcoin has experienced explosive and implosive price action over the past fourteen years, $1 invested in Bitcoin in 2010 at five cents is currently worth over $1.1 million. The incredible rise has caused many other cryptocurrencies to emerge in an asset class worth around $2 trillion, with Bitcoin accounting for 56% of the market cap.

Traditional fiat currencies derive value from the full faith and credit of the countries that issue the legal tender. Reserve currencies are fully exchangeable from countries exhibiting political and economic stability. The U.S. dollar is the world’s reserve currency, but that could be changing. History teaches that the lifespan of a reserve currency is around a century, and the dollar’s dominance is now over one hundred years old.

Technology continues to change our lives. Currencies or means of exchange will increasingly reflect technological advances in finance that increase speed and efficiency.

There are many cryptos, but the eight-figure crowd is limited

• Bitcoin and Ethereum, the two leading cryptos, have market caps over 70% of the market’s entire value.
• Only three cryptos (Bitcoin, Ethereum, and Tether) have over $100 billion market caps.
• The top eleven cryptos have market caps over $10, reflecting nearly 89% of the total asset class’s value.
• While many other cryptos are floating around in cyberspace, they are like the pink sheet stocks with low odds of survival and success.

The case for higher crypto prices over the coming years

• Cryptos depend on Blockchain, which creates speed and efficiency.
• Cryptos have increased their addressable market through regulated futures and ETF products on the leading cryptocurrencies.
• The trend toward globalization means currencies that transcend borders gain significance.
• The incredible appreciation has caused substantial speculative interest.

The case for limited upside for the burgeoning currency market

• Governments derive power from controlling purse strings. Control of the money supply through monetary and economic policy is critical.
• Cryptocurrencies remove government control of the money supply.
• Expect government regulation and even bans to increase as the cryptocurrency asset class’s market cap rises. The $3 trillion level could be a line in the sand for many governments.
• Significant government intervention could cause another implosive price move.

 Expect governments to adjust to technological advances

• Governments, central banks, and monetary authorities realize that traditional finance has not kept pace with technology.
• Digital dollars and other currencies already exist, as balance transfers settle most transactions through banking portals.
• Expect countries to begin issuing digital fiat currencies to replace paper money and coinage.

Diversification is critical for investors and traders- Crypto allocations should reflect the risks

• Successful trading and investing depend on asset diversification.
• Cryptocurrencies have upside potential as the world shifts from existing currencies and traditional finance.
• Only invest capital you can afford to lose, as the potential for significant rewards comes with commensurate risks.
• Expect and embrace the coming changes in traditional currency markets, finance, and the cryptocurrency arena.

The takeaway is that globalization of finance will change the status quo over the coming years. A flexible approach to diversification will likely protect capital and optimize results.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!