Market Basics

What’s Behind All the Hype?

When Bitcoin (BTC) launched in 2009, crypto’s primary appeal was as a digital, secure, and confidential medium of exchange – operating without intermediaries. Since then, thousands of individual cryptocurrencies have launched into the market with a wide variety of utility. In this article, we go beyond the media buzz to provide four examples of how cryptocurrency can potentially upend global financial markets in the future.

Why Is Crypto Making Waves with Global Online Payments?

Many people think of cryptocurrencies as an asset for trading and investing. However, cryptocurrencies like Bitcoin were initially created with the vision of being a means for conducting day-to-day transactions. As the industry continues to mature, more people are using cryptocurrencies to make online payments, tokenize art and culture, develop new communities, develop new products and services as well as develop new business models. It seems that every few weeks large companies are announcing that they accept crypto as a form of payment. For example, household Fortune 500 companies like Coca Cola, Whole Foods, and Burger King now accept cryptocurrency transactions.

So why would a person or business want to make online transactions with crypto?

• Access. International transfers using cryptocurrencies tend to be much easier to conduct, have less red tape, are typically available 24×7 on both weekends as well as holidays and most funds transfers are available immediately after a blockchain confirmation.
• No bank account required. Many people in developing countries who do not have access to banks can make crypto transactions if they have internet access. You no longer must pay transaction fees by doing away with a bank, though you are subject to network fees.
• No waiting periods. Since you are eliminating an intermediary, you no longer need to go through pesky authorizations or long wait periods to complete a transfer.

Many people would be surprised by the number of merchants already accepting bitcoin and other cryptocurrencies for direct payment. To take advantage of the rapid growth in the space, some financial firms have connected crypto to traditional payment rails, allowing customers to spend crypto through a credit or debit card that converts crypto into USD to pay the merchant. With rapid growth comes the need for scalability, however. People paying in bitcoin, the most frequently used cryptocurrency for payments, can take advantage of the lightning network, an off-chain technological solution that increases transaction speed.

A common concern about using crypto for payment is its real-world viability as a medium of exchange. The argument is that assets with high volatility can make for less- than-optimal payment vehicles. Since volatility can be typical in many cryptocurrencies, many users have turned to stable coins as a solution. Stable coins like USD Coin or Tether aim to digitize the US Dollar into a crypto token.

Why is Crypto Being Rapidly Adopted Across Developing Countries?

Not all countries have a stable government, economy and currency. History is littered with corrupt governments who plundered resources, restricted the flow of capital outside their borders, and printed – and printed – a national currency to meet suspect obligations. A sharp increase in a nation’s money supply can be a driver of inflation – eroding the value of a currency and its residents’ savings. If you live in a second- or third- world country, a popular cryptocurrency may be far less volatile than your nation’s currency. Billions of individuals who never had access to an internet connection now do – but lack access to stable money, traditional banks and foreign exchange. According to a 2020 article published by Modern Consensus, five of the top 10 countries globally for cryptocurrency usage are developing nations: Colombia, Kenya, Nigeria, Venezuela and Vietnam.

What Are Tokenized Assets and Why Are They Catching Fire?

Many new to the crypto industry are unaware that crypto tokens are not just used as a medium of exchange. Individuals and institutions are using tokens as tools to establish digital ownership and track rights to real-world private assets – helping to create liquidity for illiquid assets. The potential use of tokenized assets across the multi-trillion-dollar private investment industry, like commercial real estate, fine art and investment in businesses, is seemingly unlimited. While a share of stock can signify that you own a piece of a public company – so too can a token acquired through a security token offering (STO). The primary benefit of tokenized assets is that they can be bought or sold online without a broker, decreasing time to ownership and transaction costs. Platforms like Tokeny, Polymath, and Smartland are creating a token-based market for private investments that offers the potential for a more open, efficient and equitable financial landscape.

How is Cryptocurrency Transforming High Finance?

Crypto is also upending one of the oldest and most celebrated corners of high finance – venture capital (VC). VC firms, which are a sub-category of private equity, provide private capital and advice to early-stage companies in exchange for an ownership stake. The crypto industry waded into this $500 billion market in 2017 with initial coin offerings (ICOs), a novel way to fund early-stage companies. With ICOs, entrepreneurs can sell crypto tokens to investors related to a startup business they are launching or building. If the startup is successful, the value of the crypto tokens will rise – and the company’s founders can fund their company without ceding ownership to VC firms. One of the most successful ICOs was NEO, a China-based crypto project that supports decentralized finance and smart applications. NEO’s ICO in 2015 was priced at just $0.03 per token, boasted institutional investors like Microsoft, and reached an all-time high of $180 per token.

While ICO’s have captured the attention of companies looking for funding, they are not without risks. One Boston College study found that less than 50% survive past their first four months. ICOs carry a lot of risk in a space where fraud is still common.

Three Takeaways

• Beneath the media buzz, crypto is creating noise as it makes inroads into billion-and- trillion-dollar global markets for consumers and businesses.
• Crypto typically has lower transaction costs than other popular forms of electronic payments and has near-instant delivery of funds. It also is finding rapid adoption as an alternative medium of exchange by residents of developing countries.
• Investors of all sizes are using crypto tokens to secure and track digital ownership of real-world private and illiquid assets – disrupting traditional areas of finance.