Cryptocurrency - Just Another Asset Class?

“Let’s change the world, let’s lift it / Let’s take it and awake it …” - Wayne Visser

The internet is inseparable today from our daily life. The history of the internet started in the 1960s and it came up as an academic project with the idea of a global computer network. In the 1990s, the World Wide Web incarnated and Microsoft launched Windows 95 and internet explorer. The Internet, once a government-funded network, has evolved drastically since its inception. Today the internet is a collection of technologies and communities. Once it was projected as just another media but now it has engulfed the global media and created a social layer. The media consumers, once passive, are playing an influential role in this digital age. The connected conversation is changing the world.

Gary Gensler, the Chairman of the United States SEC, appeared before the European Parliament through a virtual mode of communication some days back to tell that Cryptocurrency could be as disruptive as the internet itself. Bitcoin, called ‘Ponzi’ and ‘Punt’ numerous times, is enjoying its newfound acceptance globally nowadays and establishing itself as the ‘digital gold’. The mining of Bitcoin consumes more electricity than the electricity consumption of the entire countries of Sweden and the Netherlands. Corporations have started to put Bitcoin in their balance sheets. Many other cryptocurrencies also have started to ride the popularity wave of Bitcoin. Retail investors are entering the market with exuberance. Skyrocketing trade volume is surprising the market analysts. But can cryptocurrency disrupt the world like the internet really?

“Crypto is just another asset class = the internet is just another TV channel. It’s more than an asset class because it transforms the custody, trading, issuance, governance, and programmability of anything scarce. It’s a new financial system, not just some ticker symbols.” – Balaji Srinivasan

The pandemic brought a perfect storm. Stock markets and all traditional assets plummeted in Q1 of 2020. Every liquid asset felt sell-off pressure and Bitcoin price dropped to USD 3900 on 12th March 2020 that is known as ‘Black Thursday’. The global financial market recovered slowly after that and the cryptocurrency market saw an amazing bull run. The pandemic is still not over. All corporates and governments are focusing on cost-cutting measures. Software-driven innovations are taking away jobs and people have got accustomed to staying at home. Machines are acquiring cognitive abilities due to AI. The net lay-offs are being imbibed into the economy as a structural change. People are looking for alternative investment and cryptocurrency has emerged as the alternative asset class. But is it just another asset?

DeFi or decentralized finance is the talk of the town today. A novel financial standard where no third party is involved has got investor attention and become a movement. The power in traditional finance is extremely centralized. When people invest, they need to provide control of their funds to a custodian. The process causes the accumulation of power and exposes the system to potential abuse. A single point failure can damage the system. Participation volume in traditional finance is also miserable. We still talk about banking the unbanked in the 21st century. DeFi gained popularity due to its openness. Anybody and everybody can participate in DeFi with their wallets. The smart contracts are the financial robots managing DeFi platforms. Permissionless finance is an innovation. An analogy between cryptocurrency allowing everyone to become an investor and the internet allowing everyone to become a publisher can be drawn easily.

Blockchain technology is bringing everything on-chain. Precious metals, stocks, bonds or even real estate can be tokenised and traded over the blockchain. This opens up a plethora of opportunities. Traditional finance’s core competency is compliance but financial inclusion and transparency have remained a distant dream. Cryptocurrency and blockchain technology have brought true innovation in fintech. The on-chain transactions are immutable and auditable. People are embracing cryptocurrency for financial freedom. Recently, Bitcoin was declared as legal tender of El Salvador, a country in Central America. The nations are being made nonpartisan by cryptocurrency.

NFTs or non-fungible tokens have gained wild popularity recently. Digital art can be copied endlessly but the digital signature of the art on the blockchain makes it unique. Verifiable scarcity of NFTs is a big innovation and the NFT market is growing like a rocket. The trading of NFTs began in 2017 as a blockchain experiment but now it has become a trend. The artists have got a new way of generating revenue without a middleman. The scope of NFTs is too large and not limited to only digital arts. Music NFTs are also becoming very popular nowadays and many music labels have shown interest to protect their intellectual property rights through NFTs. The true success of innovation lies in driving productivity. Productivity drives economic growth.

While all assets are coming to the blockchain, organizations are also being formed on the blockchain. DAO or Decentralized Autonomous Organization is an organization without any central leadership or hierarchy. A DAO comes with a structure where the stakeholders take part in decision making and operating as per the code of conduct and internal law. A DAO has no physical address and it generally exists as a smart contract on the blockchain. DAO voting takes place on-chain for any kind of decision making. Generally, the voting power is proportional to the governance token holding amount. These governance tokens are digital assets issued on the blockchain. The next generation business is going to be more participatory and decentralized with help of blockchain technology. On-chain organizations, on-chain decision making, on-chain accounting can radically change the way industries operate.

In the history of mankind, we have occasionally seen that new asset classes emerge. Survival assets like food and shelter are the most primitive assets. Precious metals have maintained a store of value for a long time. Stocks, bonds and derivatives are obviously not so old in nature. The evolution of technology has historically added complexity to our assets and sometimes new technology can become the basis of the asset. Representation of wealth and ownership has always remained a dynamic process. Cryptocurrency is the latest addition to this group and can be considered to be the most open asset class for the masses.

Web 2 movement of the internet brought user-generated content and participation in the world of connected computers. Web 2 movement is still going on but we have started to see a paradigm shift in internet applications. Web 3 movement of the internet is going to be more disruptive as it will lead us to open networks and trustless interactions. Cryptocurrency will provide probable fairness to the Web 3 environment and incentivise the long trail of stakeholders. The era of economic transnationalism is destined to arrive through blockchain. Cryptocurrency has not yet become essential to society, so investors should be ready to deal with volatility. Not just an asset class, we are witnessing the next generation epoch-making socio-economic awakening built around the internet.

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