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Digital nugget: The crypto megatrend

The crypto megatrend

Digital Nugget

The primary long-term investment case for crypto is based on blockchain being a disruptive foundational technology, much like the internet was. Decentralised blockchain protocols providing the underlying technology for a large number of use cases – many of which have not even been conceived of yet – is the “internet-like” megatrend that justifies long-term investment in the asset class. A second important investment case is crypto as a safe haven asset (“digital gold”). While it is an important value driver from a diversification perspective, its scope is more limited than the first case, both in terms of protocols (largely focused on Bitcoin and possibly Ether) and market impact. Finally, there is demand for crypto as decentralised money. This, however, is likely a ‘trend’ rather than a ‘megatrend’, as it is necessarily limited by central banks’ control over currencies.

The rationale

The innovation underpinning crypto assets is the distributed ledger technology, which provides the basis for decentralised ecosystems replacing private corporations.

Decentralisation has many benefits. In some ways, it is like the Swiss political system – arguably the most consistently stable and resilient – turned into computer code.

Decentralisation, on the one hand, removes the need for intermediaries to a great extent, saving time and cost. On the other hand, it avoids the misalignment of incentives that comes with centralisation. Decentralised ecosystems are also economically efficient due to their transparency, which eliminates the need for a lot of costly regulatory disclosures that need to be imposed on corporations, while the unalterable, cryptographically secured databases ensure the veracity of the information.

Still early stage

The adoption of the internet provides a reference point.

Internet vs. crypto adoption

Source: World Bank, Crypto.com

The growth in the number of crypto users closely tracks the growth of internet users in the early stages. The chart shows that the current adoption of crypto is roughly on par with the adoption of the internet around 1998 – well before its powerful use cases were devised and exploited.

Since then, internet adoption has reached over 90 percent of the Western population and two-thirds of the global population.

The still-limited visibility on the use cases of crypto is in line with the path the internet has taken.

Use cases

Numerous use cases for crypto have already found adoption.

Stablecoins:

  • Stablecoins were originally created to limit the need for crypto traders and investors to do high-friction fiat-to-crypto conversions.
  • Consequently, they found adoption as efficient settlement networks and payment rails.
  • Stablecoins face challenges as they innovate to find the most appropriate structure for reserves, collateral or algorithms, while governments – that may also see stablecoins as competition to fiat currencies and payment systems – implement regulations.

Decentralised alternatives to various financial services (lending, insurance, trading, payment services, etc.), data storage, cloud computing, social media, streaming services, gaming or the next generation of shopping experiences in the metaverse:

  • The blueprint has been laid for how decentralised networks can provide the same services as corporations in several industries across the economy.
  • Challenges remain with the technology, which requires further scalability, security improvements and experimentation to find the optimal economic models for the tokens.
  • In addition, a lack of regulatory clarity remains an obstacle in many cases.
  • Innovation, however, progresses, and funding remains readily available for promising projects.
  • The growing number of collaborations with traditional corporations (McDonald/The Sandbox, T-Mobile/Helium, etc.) can catalyse user growth.

Tokenisation:

  • Major financial institutions have long perceived the opportunity in tokenising traditional financial assets and using the rails of decentralised blockchains for trading and settlement, and several institutions have invested in teams and systems.
  • However, investor demand for tokenised assets has been low until recently.
  • The recent rise in fiat interest rates against the backdrop of a crypto bear market created demand from crypto-native investors for tokenised fiat instruments.
  • This may be the catalyst that can lead to the long-anticipated growth in the market capitalisation and traded volume of tokenised assets, and strong year-to-date growth provides confirmation.

Fundraising:

  • Launching tokens on the blockchain as a means of raising funds holds strong appeal, as the liquidity and transferability of tokens are distinct advantages.
  • The ‘ICO Boom’ of 2016–7 unfortunately saw many unworthy projects raise funds from crypto investors who were not very discriminating in their investment decisions.
  • After many of these tokens lost their value in the aftermath, volumes in the fundraising market have not yet been reinvigorated, however, the fundamental business case remains.

NFTs:

  • Arts, collectables and profile picture NFTs have captured the imagination and attracted speculative interest, but utility NFTs are far more significant in catalysing real-world use cases.
  • NFTs can represent identity (“soulbound tokens”), title of ownership (e.g. ticketing or domain names), membership, loyalty rewards (e.g. Starbucks NFT loyalty programme), discounts, access rights or representation of physical products.
  • While the NFT collectables market has been in a slump, the use of utility NFTs has been increasing.

Private blockchains:

  • Private blockchains allow better collaboration within an ecosystem (for example, between participants in a supply chain or a settlement network).
  • They are separate from the public blockchain networks, however, interoperability allows them to interact with each other, providing additional transaction volume to public blockchain networks.
  • The recent collaboration between SWIFT and Chainlink is an example.

Evidence of adoption

A recent study by The Block shows that Fortune 100 companies are heavily investing in crypto, blockchain and Web3 technologies, and the number of crypto-related initiatives launched by these corporations has been steadily growing since 2020.

According to the study, in the wider Fortune 500 universe, 64 percent of companies considered it important to invest in these technologies to gain or maintain a competitive advantage.

As excitement over AI has stolen some of the limelight, collaborations and integration between crypto and AI projects are a further growth driver.

Although widespread crypto adoption and proliferation of use cases remain medium- to long-term prospects, there is substantial evidence that the potential for crypto to reshape industries and unlock new opportunities for growth and innovation has been recognised.

[1] Crypto adoption: https://cvj.ch/en/focus/blockchain/fortune-100-companies-are-increasingly-adopting-crypto-and-blockchain/

Read more about crypto assets from Sygnum here.

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This document is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.

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