Crypto Assets - Why You Should Consider Investing In Them Today

In our previous article, we discussed how the response to the Covid-19 pandemic and governments' measures to stimulate economies are probably going to substantially dilute your savings. As promised, we will now review the possibilities you can consider to mitigate this issue. We will kick-off the series first, with a look at crypto assets.

What is a crypto asset?

So what are crypto assets? Crypto assets may sound exotic but they are actually based on a principle that is not so different to how money is held in your bank account or the way, for instance, corporate shares are traded today. Those “things” essentially exist as entries in databases. However, banks or stock brokers have databases that are under centralized control. In other words, some identifiable organizations determine what the content of the database is, who has what amounts of money or assets next to their name, and so on. Any transactions with traditional money or financial assets have to pass through such intermediaries. See our YouTube video on what blockchains are here.

Blockchain technology changes this core element - the system is not private, but public. A blockchain is a decentralized database maintained by nodes that do not need anyone’s permission to maintain it. Furthermore, anyone who so desires can create a cryptographically secured account (a public address) on a public blockchain and send and receive transactions peer-to-peer, without intermediaries.

Other built-in cryptographic mechanisms and carefully designed incentives ensure that it would be extremely difficult and unattractive for the nodes that maintain public blockchains to tamper with incoming and past transactions and people’s asset holdings. Thus, for all intents and purposes, blockchains are immutable ledgers of transactions with which everyone can interact.

Brief historical overview of crypto assets

Crypto assets were born in 2009 with the creation of the Bitcoin blockchain and the namesake cryptocurrency (BTC). While there was no trading initially, people had discovered that there was a demand for both buying and selling BTC. Cryptocurrency exchanges were born and the explosive growth in BTC prices, among other reasons, motivated other researchers and developers to launch other blockchain projects and cryptocurrencies.

The Ethereum project that launched in 2015 took the blockchain and crypto asset vision much further. Using smart contracts made it possible for projects to create crypto assets not just for blockchains but for applications built on top of them.

This spurred, between 2016 and 2018, the era of utility tokens and their public offerings (called initial coin offerings, or ICOs) for projects such as Augur and Gnosis (decentralized prediction markets), Golem and iExec (distributed computing), Basic Attention Token (personalized online advertising), MakerDAO (a platform for programmatic stablecoins) and many others.

Finally, a range of smart contract platform projects emerged. Projects building on top of them are also starting to issue tokens on those blockchains. This has rapidly created a growing financial ecosystem with thousands of assets.

This ecosystem and its related infrastructure are also maturing rapidly, though not without some major growing pains. There are currently scores of major cryptocurrency exchanges, crypto asset data tracking platforms, services for asset custody, saving and lending in crypto assets, and more.

The crypto space undoubtedly has a huge potential for the transformation of many industries, from traditional finance to the sharing economy, from cloud computing and storage to the Internet of Things. For a nice short talk on the promise of blockchain/crypto technologies see this TED talk by Charles Hoskinson.

How have crypto assets performed compared to some other financial instruments?

You're probably wondering how crypto assets have performed historically compared to other investment alternatives. Initially a completely insignificant niche, they attracted sudden attention in late 2017 which led to a massive upswing in their prices across the board, grabbing the whole world's attention.

Since then, the total market capitalization of crypto assets has decreased by around three-fourths from its peak. It has also fluctuated a lot since then. However, if we compare the performance of crypto assets to major financial indices since December 15, 2019 (just before the current pandemic became public), we see that the total market cap of crypto assets has outperformed them. Between that date and today, it has essentially remained flat (with a lot of fluctuation in between).

Meanwhile, all the major stock market indices that we studied (e.g. S&P 500, DJIA, Euro Stoxx 50, FTSE China A50 ) have undergone significant declines.

The superior performance of crypto assets thus far may be due to the perceived independence of crypto projects from fiat money issuance, and even the expectation that many crypto assets would be used as a hedge against inflation. Crypto projects are also less impacted by forced physical distancing, as most of them can continue implementation by remote workers.

But at the same time, we must note that some investment types have performed better than the crypto market cap. The most obvious example is gold whose price per ounce has actually grown from around $1327 to around $1566 (an 18% increase between December 15, 2019, and today).

A word of caution

Despite all of the positive things we said about crypto assets in this article, there are a few important caveats to point out. First off, crypto assets and their underlying technologies are still relatively new, and they have been developed very quickly. It is still possible that there will be some fundamental flaw with blockchain technology that will ultimately render the whole crypto asset vision unrealizable. One risk, although rather unlikely, comes from the fact that quantum computers could soon break the encryption schemes securing the blockchains, but there is already work underway on quantum-resistant cryptography. Moreover, despite the encouraging maturation of the crypto ecosystem, the quality of crypto asset markets still leaves much to be desired. There are not enough institutional and qualified investors involved in crypto asset trading platforms, as many exchanges exhibit dubious trading patterns and probably falsify volumes. Pump and dump schemes still work, and so on. Also, in the crypto space, there are a lot of projects that are either of poor quality, too ambitious, with poor market fit, or are even outright fraudulent (scams). Such projects’ crypto assets can still often perform well on the market because of aggressive marketing and overpromising. A lot of care should be taken to distinguish the projects worthy of attention from distractions. The regulatory situation with regard to crypto assets is not completely rosy, either. They have been mostly developing somewhat orthogonally to the existing legal systems whose creators could never have imagined them. This creates risks of conflicts with governments, some of which have already materialized. Last but not least, so far, none of the blockchain platforms or decentralized applications have achieved mass adoption. Part of this is quite probably because of regulatory difficulties. But some of it is probably because there are some costs and complexities inherent in these tools that make them not obviously useful or too exotic to many people and organizations. A lot of work remains to be done in this regard.

The Covid-19 pandemic and the world's subsequent response have put people’s savings under significant threat from inflationary dilution. If you are willing to try to protect your hard-earned money against this threat, you might want to consider crypto assets as a means to protect against inflation. They have performed relatively decently lately compared to some other major asset classes. While assets like gold are probably a better short-term hedge against inflation, crypto assets may have better future growth potential than those as they relate to cutting-edge projects. That said, while crypto assets and their underlying projects present an exciting promise, any future profits from investing into them are highly uncertain, and the crypto space faces significant risks. We encourage you to do your own research when looking into how to invest in crypto assets and especially before investing into anything. We do recommend looking into advanced crypto asset trading platforms which may be more reputable.

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