Cryptocurrencies have a reputation for being volatile but the month of May has bucked the trend, finishing up rather uneventful. Despite the “big news” of the Bitcoin halving on 11 May, the major cryptos turned in a mediocre performance for the month. Furthermore, Goldman Sachs have been causing uproar in the crypto community this week. This month’s roundup looks at recent events and what it could mean for the future of crypto.
As you can see from the table, approximately 50% of the coins generated a positive rate of return. The remaining coins generated small losses. NEO was the leader of the pack, with a solid monthly gain of 16.3%.
Will Cryptocurrencies Ever Become A Major Asset Class?
Firstly, what is an asset class? It is a group of financial instruments that share similar financial characteristics and behave similarly in the global marketplace. From a broad macro perspective, these financial instruments are divided between real assets and financial assets.
Real assets consist of commodities and real estate. Financial assets consist of stocks, bonds and cash. Therefore, there are a total of five major asset classes.
During the past few years, an increasing number of have investors have argued that cryptocurrencies should be listed as a major asset class within the realm of financial assets. Their argument is based on the fact that cryptocurrencies are playing an ever-increasing role in the global investment ecosystem. However, this week, Goldman Sachs made waves in the cryptocurrencies universe as they declared on an investor call that “cryptocurrencies are not an asset class.”
However, there are legitimate reasons why cryptocurrencies have a valid place among other asset classes. Let’s discuss the details.
Without question, the crypto universe has experienced unprecedented growth during the past decade. In terms of Bitcoin market capitalization, the rate of growth has been staggering. Take a look at the market cap of BTC from 2013 through 2020.
Bitcoin Market Capitalization (Source: Statista):
- Q1 2013 – $1.02 USD billion
- Q1 2014 – $5.75 USD billion
- Q1 2015 – $3.40 USD billion
- Q1 2016 – $6.41 USD billion
- Q1 2017 – $17.56 USD billion
- Q1 2018 – $117.56 USD billion
- Q1 2019 – $72.34 USD billion
- Q1 2020 – $117.81 USD billion
During the past seven years, the market capitalization of Bitcoin has increased 11,450%. From a historical perspective, this represents the largest percentage move compared to any other asset class over a 7-year period.
How does the market capitalization of cryptocurrencies compare with other major asset classes? Well, check out the following data compiled from Bloomberg, Savills PLC, Futures Industry Association and Federal Reserve System.
Market Capitalization Of Asset Classes
- Global Real Estate – $228 trillion
- Global Bond Market – $102.8 trillion
- Global Bank Deposits (cash) – $86.5 trillion
- Global Stock Market – $67.5 trillion
- Global Commodities – $33.6 trillion
As you can see from the data, the market cap of Bitcoin is tiny compared to the other major asset classes. In fact, even if we include the market cap of all cryptocurrencies ($263.9 billion), the values are not even close. Cryptocurrencies are less than 1% the size of the smallest major asset class, commodities.
Size isn’t Everything
The relative size of the crypto universe should not be the only determining factor when deciding if cryptocurrencies should be listed as a major asset class. In addition to market cap, another important factor is asset correlation. For example, do cryptos move in the same direction as the other major asset classes? A lack of correlation was one of the key arguments put forward by Goldman Sachs in the recent controversial investor call.
Based on historical results over the course of the past decade, the answer is “No.” Cryptocurrencies have a tendency to move independently of stocks, bonds, commodities, and real estate. Asset correlation is a very important determining factor because it provides investors with the opportunity to diversify their investment portfolios. However, it’s worth bearing in mind that gold derives a large part of its value precisely because it has an inverse relationship with other asset classes.
The Reach of Crypto is its Biggest Selling Point
Arguably, the most important factor in determining the suitability of cryptocurrencies as a major asset class is availability. Are cryptocurrencies available to the global investment community? Can investors from all over the world buy and sell cryptocurrencies? Generally speaking, the answer is “Yes.”
In fact, in terms of accessibility, cryptocurrencies have a longer global reach than stocks, bonds, or commodities. It’s much easier for people in developing countries to purchase cryptocurrencies in comparison to stocks, bonds, and commodities.
Why? Because cryptocurrencies are decentralized. They are not linked to centralized exchanges or legacy financial systems. This is a huge “plus” for cryptocurrencies, as it means they’re more likely to become adopted by people in demographical groups who are traditionally excluded from investing in other asset classes.
Recognizing cryptocurrencies as a major asset class would be incredibly bullish for Bitcoin, because it would encourage institutional investors, pension funds, family offices, and endowments to become crypto investors.
For the most part, institutional money has remained on the sidelines in regard to cryptocurrencies. Large institutional investors and high net worth individuals have basically ignored Bitcoin and other cryptocurrencies as a legitimate investment vehicle. But the attitude of the global investment community will completely change if cryptocurrencies are classified as a major asset class.
Based on the continued growth rate of Bitcoin and other cryptocurrencies, it’s surely only a matter of time before Goldman Sachs is proved wrong, and digital assets take their place among other major asset classes.
Driving Demand is Key to Growth
If, and when, the global investment community decides to stop resisting the growth of cryptocurrencies, Digitex will be ready. We’re continuing to onboard new traders to our state-of-the art, zero-fee trading platform.
But this is just the beginning of the Digitex journey. We’re committed to developing the markets, features, and liquidity of our exchange, but more importantly, to driving demand for the DGTX token. The greater the demand, the bigger the value, and the better the chances that cryptocurrencies will receive the recognition they deserve from the global investment community.
Digitex Futures writers and/or guest authors may or may not have a vested interest in the Digitex Futures project and/or other businesses mentioned throughout the site. None of the content on Digitex Futures is investment advice nor is it a replacement for advice from a certified financial planner.