Have you attempted to understand cryptocurrencies and found yourself out of depth with layers of new concepts? You’re not alone. This article follows the cryptocurrency rabbit-hole to unravel the complexity that is now forming parts of the digital economy and creating a new source of liquidity, growth, and millionaires/billionaires.
To kick off, we detour from looking at the history of crypto since this is widely available, to examine the current trends in crypto.
## Bitcoin (BTC)
Originally, BTC the cryptocurrency with the highest market capitalization as at the time of this writing, was a digital currency that served primarily as a transactional token used to conduct business transactions over the dark Web due to how it provided anonymity to both parties exchanging value. This was the original use case, as it was beyond regulatory oversight and thus could be used to settle transactions that may attract scrutiny from governments. However, this use case seems to be evolving.
In 2021, institutional investors appear to have caught on the hype of cryptocurrencies especially Bitcoin. The interest from institutional investors, appear to be different from using Bitcoin as a transactional token, but as an investment token, which when placed on a balance sheet can grow independently and generate future convertible cash reserves for the company. Tesla announced in Feb of 2021 that it was acquiring 1.3 by USD of bitcoin, the Central Bank of Kenya also made a similar announcement that highlighted its intentions to acquire BTC on its balance sheet as well, as an asset-class.
These moves, along with the general perception of Bitcoin enthusiasts namely HODL (Hold On for Dear Life), imply a shift in sentiment for BTC from being a transactional token, to a growth/investment token. The purest illustration of this is reflected in a story of a man who purchased 2 large Papa John pizzas
for 10,000 bitcoins (now worth $550 million) in 2010. Anyone standing in the present, and willing to trade their BTC for current services, may infact be in the same hall of fame as pizza guy.
Another illustration of the shift of BTC from transactional token to investment token is shown by the graph below.
The graph implies that relative to the USD, BTC is gaining more value daily than the USD. Thus it is more economical to spend the USD than BTC, and more rational to HODL BTC. This is made more evident, when you compare the price of an item, priced in BTC 11 years ago (read 2 large Papa John Pizzas), to what it could be priced today; the price in BTC would have gone from 10,000 BTC for 2 pizzas to 0.00053 Bitcoin ( I checked! ). In 2010, 1 BTC was worth 8 cents, and today it is worth 55,000, a 647,499% increase! Thus, by standing today and projecting into the future, it becomes evident why the trend is HODL.
With BTC (and all its advantages of being a transactional token) becoming too valuable to spend, it follows naturally that other crypto which also boast some value, and offer the benefits of low transactional costs, using similar blockchain protocol will be considered as transactional tokens. While many tokens contest for this space, the emergent leader is yet to be known. A few notable mentions are Stable coins: USDT, USDC, BUSD, DAI and transactional tokens like Litecoin, DOGE, Stellar and Monero.
For the uninitiated, Altcoins are dangerous tokens minted by nefarious identities seeking to profit by luring cryptocurrency holders into exchanging valuable cryptotokens and by extension fiat money for worthless cryptotokens. However, while every economy co-exists with the criminally minded, real solutions are being created by businesses offering services to crypto-exchanges and holders of valuable cryptocurrencies. Some of these businesses are built in a space called Decentralised Finance AKA DeFi.
Some of these businesses, offer contracts to holders of BTC and other valuable crypto, to fix their tokens in a liquidity pool and earn interest yearly. This pool of tokens is then used to meet an insatiable demand for those wishing to sell/buy cryptocurrencies via an exchange. Without these pools, those willing to trade would need to meet a counterparty also willing to accept the offer they are willing to trade at, this would slow down the trade process and be counterproductive for the growth of the exchange. Thus, these businesses are called market makers.
The businesses in turn, reward those who fix their tokens with interest and tokens issued by that business. These tokens can then be reinvested, or sold for more gains depending on the value of the tokens. This is a mild illustration of how some businesses in the DeFi space operate.
The interesting thing about this trend is that, liquidity is created and accessed but not from a financial institution, or the stock market but from an entirely new source. If this trend continues, more real businesses will look to offer services using blockchain technology to reward those who lend valuable tokens to these businesses with name-brand tokens that may have value in the real word like discounted services, free experience coupons etc.
Based on these developments, the fix is in that Altcoins are here to stay, and here to be understood. The DeFi space will benefit as more creative minds link opportunities to access finance and offer valuable services.
Using the popular demographic structure, we can make narrow predictions about the behaviour of 3 key demographics towards cryptocurrencies. This part of the article should be taken lightly as it is open to be falsified by reality.
This population is accustomed to fiat, and are likely to be the most skeptical of cryptocurrencies pegging it a scam. Nevertheless Boomers who are amenable to trends are more likely to hold cryptocurrencies that have can demonstrate a high market capitalization consistently i.e. BTC.
Given that Boomers will be entirely out of the way in 30 years, we are unlikely to see Boomers drive any trends or adoption of cryptocurrencies.
This population are the early adopters of cryptocurrencies, who now champion the advocacy of cryptocurrencies. Their success has attracted major brands such as PayPal, Visa and Mastercard to facilitate the settlement of transactions in BTC. Although, having seen the trajectory BTC has followed, this population are likely to be the ones driving the HODL culture.
Millenials are also active in the DeFi space, creating the Altcoins that now add value to those willing to offer blockchain services to users of the cryptoconomy. While some millenials remain wary of Altcoins, due to the previous ICO scam era of 2017/8, some have plunged the depths to identify growth margins that would be mightily scary to retail traders accustomed to regular financial markets.
## Gen Z
This is the generation that grew up with Robinhood apps, and trade leverage options with their lunch money. The Gen Z are accustomed to taking huge risks just for the thrill, and will positively explore any token or financial asset for the idea of becoming an overnight success. This population is likely to drive the popularity of DeFi products and ultimately be instrumental in the success of DeFi.
As this population matures, the oddcoins and tokens they are accustomed to holding will naturally attract more capital, and thus become even more valuable as time passes(read DOGE, among others).
Gen Z are also likely to be instrumental in transforming the DeFi landscape with the launch of new products tied to creativity, and digital products.
From all indications, barring government intervention Cryptocurrencies are here to stay; both transactional tokens, and Altcoins. In countries, that have proceeded to ban access to cryptocurrencies, demand has naturally surged thus further incentivizing HODLers. Naturally, given the level of finance flowing into cryptocurrencies lately, it is evident that new millionaires and billionaires will be minted by using these tokens judiciously. Thus, it will be counterproductive for a poor nation, to fight such a wealth creation asset unless the nation is committed to keeping its citizens poor.
To take the conversation further, I have scheduled a clubhouse session here, which will discuss “The New Cryptoconomy”. Those unable to join the conversation will find a recording of the chat on my YouTube channel. Follow and click on notification to be notified once the content is uploaded.