Over the past few months, we’ve seen tremendous growth in crypto markets. Since I wrote the article The case for crypto in your portfolio, the cryptocurrency market cap has risen from US$363m to US$1,971m – close to 500% in gains across the broad market so far.
Large-caps like Bitcoin and Ethereum have jumped 800% to 1200% over the past year in response to unprecedented government stimulus, growth in decentralized finance and rise in lockdown spending.
We are also seeing bubble like characteristics in the rest of the crypto market, with tokens like Solana (SOL) jumping more than 4300% since its lows due to an increasing adoption of alternative scaling solutions to Etheruem which has seen its network becoming congested.
Even tokens without clear use cases like Ripple have risen from the dead multiple times.
Stablecoin growth exceeded expectations
Growth in stablecoin liquidity have also contributed to the rise in the crypto markets, fueled by high interest rates in centralised lending platforms like BlockFi and Nexo and yield farming opportunities on them such as Curve and mStable.
Stablecoin growth in the top 10 stablecoins by market capitalisation have all seen positive momentum. USDT circulation has grown alongside alternatives like USDC by Circles and BUSD by Binance/Paxos.
Even synthetic stablecoins which are not fully backed by any fiat currency have seen tremendous growth over the past several months.
While DAI – collateralised by a variety of cryptocurrencies on Maker – issuance reached US$3B, newer algorithmic stablecoins like Frax (partial collateralization), Ampleforth (stabilised by supply rebases) and Empty Set Dollar (algorithmically supply rebases) have also seen relatively strong adoption.
It’s not without its failures though. Several stablecoins projects have either failed to gain traction or have to shut down to comply with regulations (e.g. Basis). Facebook’s Libra project has constantly stalled and struggled to achieve its original vision of being a permissionless global currency to rival the dollar.
Interest earning opportunities abound
Interest earning opportunities have grown strength to strength as I discussed previously, keeping cryptocurrencies locked in the ecosystem and fuelling an extended bull market.
Staking crypto for passive income in crypto across proof-of-stake blockchains like Ethereum 2.0, Polkadot, Cardano, Avalanche, Tezos and more continues to provide additional income to holders of these tokens.
Staking involves locking your cryptocurrencies onto the blockchain by delegating them to either a node or smart contract, earning rewards in the process. The growth of staking platforms like Lido Finance, Rocketpool, Stake Capital have also contributed to locking up cryptocurrencies for the longer-term, adding to supply pressures.
Opportunities in crypto
The question should I buy Bitcoin will always remain in everyone’s heads.
Using a small percentage of your portfolio to participate in the macro story of digital gold being the fastest horse across global asset classes.
With Bitcoin ETFs potentially on the horizon, expect even more retail money flows to enter the space from traditional brokerages, retirement accounts and more.
Banking providers have also caught on the hype train, with JP Morgan strategists floating the idea of 1% allocation to Bitcoin in a multi-asset portfolio. Goldman Sachs has also allowed their wealth management clients to invest in Bitcoin and other digital assets.
The number of firms servicing digital assets will only grow in number over the next decade, so brace yourself for a paradigm shift.
Bitcoin as digital gold
Bitcoin is the reserve currency of the crypto world, being the most liquid and most renown of them all with a market capitalisation of US$1T.
Owning Bitcoin is a core tenet of every crypto investment portfolio (even if it’s a small amount) because it allows you to participate in a broad spectrum of crypto investment opportunities being a key funding currency.
While Bitcoin previously had limited use cases other than speculation, assuming institutional adoption continues at this pace coupled with tighter supply, we can expect Bitcoin’s price to fluctuate less going forward, bringing it closer to a true store of value.
Bitcoin can be put to work in digital banking accounts which earn interest like BlockFi, where you can earn an annual return of 6% per annum on your Bitcoin holdings. More complex strategies include pegging them on other blockchains using bridges like Ren or wrapping them into wBTC to make them more capital efficient for use in decentralised finance.
Bitcoin could also be used as collateral for loans – if taken in stablecoins – then these stablecoins could be used in a variety of yield farming projects or be used as leverage by selling them into your favourite cryptocurrencies to multiply your crypto positions several-fold.
Ethereum as the most decentralized transactional layer
Ethereum continues to be adopted as a decentralized blockchain of choice with a variety of use cases, thanks to smart contracts which allow decentralized applications to be built on top of the blockchain.
Not only does Ethereum continue to scale with upcoming upgrades to its protocol (e.g. EIP-1559 which will change the network fee structure), Ethereum 2.0 which will support 1000s of transactions per second, layer 2 scaling solutions like Optimistic and Zero Knowledge rollups, it is increasingly becoming institutionalised as well, with Visa announcing recently that is settling transactions in USDC on Ethereum.
Ethereum will continue to be the most decentralized and global blockchain for settlement, even as alternate blockchains like Solana, Binance Smart Chain, Polkadot and xDAI gain adoption in the meantime. I am of the opinion that liquidity will flow to the chain with highest volume and adoption, and Ethereum will remain king in this competitive blockchain battlefield.
One of the strongest use cases of the blockchain and smart contracts is in non-custodial financial services known as decentralized finance.
The technology allows for financial services on the blockchain without a central intermediary – allowing for trustless financial services (lending, borrowing, custody, exchange, yield opportunities) at a global scale.
Decentralized exchanges (DEXes) like Uniswap, Sushiswap, Balancer and Curve allow for trust-less exchanges of tokens through a liquidity pool instead of a central order book in the case of centralised exchanges like Binance and Kucoin.
Being protocols, they also allow for trustless integration to any front-end, allowing anyone to build new experiences on top of them.
For example, Metamask – one of the world’s most popular browser wallets – was able to route token swaps through its interface to Uniswap.
It also allowed aggregation services like 1inch Exchange, Paraswap and Matcha to build on top of a variety of decentralised exchange protocols to route liquidity appropriately for the most efficient swaps.
What’s interesting is also DeFi’s ability to make cryptocurrencies composable, layering use cases on top of one another like lego bricks.
For example, ETH can be deposited into a Maker Vault, using it as collateral to produce a decentralized stablecoin DAI. The produced DAI can be used in a money market platform like Compound to earn interest. In return, an interest bearing stablecoin (cDAI) is given to the depositor – who can then use it on other applications like no-loss lotteries (e.g. PoolTogether) or yield farming applications.
Apart from DeFi’s composability, DeFi’s power also comes from its open integration deep within a blockchain and interoperability between blockchains.
Its open-sourced nature means that anyone can build anything on top of what’s already existing in the marketplace, giving rise to rapid innovation and huge network effects.
DeFi has also made financial products more accessible to a common man. For example, loans can be made with collateral as little as $1. Anyone can now be a market maker with as little as $0.10, earning a percentage of trading fees for providing liquidity. Anyone can also build a roboadvisor platform to allocate capital.
Financial services has been liberalised through technology.
Non-fungible tokens (NFTs)
NFTs have also made a comeback since their early days as crypto kitties.
They represent a unique tokenised version of an asset on the blockchain which means their movement can be tracked on the blockchain and ownership of the original asset can be ascertained with confidence.
The NFT marketplace has reached mania levels this year, with projects like CryptoPunks (10,000 uniquely minted on Ethereum) seeing sales prices of more than US$7.5m for these digital collectables.
You might also have read about the $69m sale of Beeple’s Everydays: The First 5000 Days NFT on the news earlier this year to Singapore-based blockchain entrepreneur Metakovan.
NFTs as digital art could see continued adoption, although sky-high prices for these art pieces represent the exuberant nature of the NFT market.
When it comes to the crypto world, everything moves at the speed of light. The pace of innovation and extreme efficiency as everything operates 24/7 permissionlessly without human intervention will continue to attract talent and innovation to the space.
I am looking forward to scaling solutions for Ethereum to come, and for one, that means DeFi will be even more accessible as costs come down. We could also see greater adoption of derivatives such as on-chain options (e.g Opyn) and leverage trading, on-chain leverage tokens (e.g. Index Coop’s Flexible Leverage Token) and more coming our way.
Meta assets such as those from mStable will also probably grow in adoption, which allows a step-change in capital efficiency by separating the capital from the yield.
I also think cross-chain DeFi will be super exciting as it will bridge value across multiple blockchains. We’ve seen what’s possible with Binance Smart Chain but even more interesting would be cross-chain AMMs, bridged index products and many more across emerging Ethereum Virtual Machine-compatible blockchains like Solana, Harmony, Avalanche, xDAI etc.
Bubble or not, crypto is not going away. Just this week, Coinbase reported stellar earnings as it prepares to IPO. Kraken – another crypto exchange – is also considering going public after seeing record volumes.
While prices at all-time highs seem almost ludicrous to buy in, some are still optimistic, with Bloomberg foreseeing Bitcoin heading to $400K this year.
It might be a self fulfilling prophecy, based on the concept of reflexivity. The higher the price of Bitcoin goes, the more desirable it becomes.
But at the rate people move capital into the ecosystem, a new dawn might be right in front of us.