
Stores of Value
- Bitcoin (39.61%)
- Litecoin (0.68%)
Cryptocurrencies are a poorly understood but rapidly growing market. In our view, Bitcoin appears to be replaceable and suffers from increasing correlations with traditional asset classes.
Several cryptocurrencies have appeared over time that have tried to solve some of the criticisms of Bitcoin by either tweaking the underlying tech or overhauling it completely.
From an investment perspective, cryptocurrencies are undergoing rapid change. Once viewed as uncorrelated asset, Bitcoin now trades very much like a cyclical, risk-on asset.
Cryptocurrencies have the habit of sharply dividing the financial community. Are Bitcoin and others in a bubble, due to deflate once investors realize some fundamental truth about cryptocurrencies? Or is the advent of the underlying blockchain technology the beginning of a new era in our financial system built on decentralized systems?
We believe cryptocurrencies are unique in their idiosyncrasy and deserve review.
Cryptocurrencies were invented in the depths of the global financial crisis to offer an alternative to the traditional banking system. Amid headlines about failing banks in 2008, the mysterious Satoshi Nakamoto authored the white paper that birthed cryptocurrencies. Indeed, in the first-mined Bitcoin block, Satoshi inscribed a message that reads, “The Times 3 January 2009 Chancellor on brink of second bailout for banks.”
To many, this message signalled the founders’ distrust of the banking system. Thus began this intriguing experiment in completely digital, cryptographically-secured assets.
Following the financial crisis, Bitcoin remained on the fringes of our economy, with occasional news stories highlighting thefts and hacking of crypto exchanges. It wasn’t until 2017 that we witnessed the first dramatic increase in price that saw interest in cryptocurrencies surge. A retail-driven bubble coincided with the advent of the first CME Bitcoin futures in the US.
Yet cryptocurrencies were undergoing rapid development and change well before these events. Other popular cryptocurrencies, such as Litecoin (launched in 2011), Dogecoin (2013), Tether (2014), and Ethereum (2015), were designed and released in the years preceding the 2017 run-up. They either tweaked the underlying technology (such as with Litecoin) or overhauled it altogether (such as with Ethereum). Today, the popular cryptocurrency tracker CoinMarketCap.com counts more than 20,000 cryptocurrencies in existence.
Market Share indicates the relative share of the market capitalization of the cryptocurrency universe, including both coins and tokens. As discussed in the PDF, the claim that any of these cryptos is a store of value is a dubious one with numerous considerations. Sources: CoinDesk, CoinGecko, CoinMarketCap.com, Coin.Dance and Invesco as of 12 January 2023. Cryptocurrency count is sourced from CoinMarketCap and CoinGecko.
Such “software” cryptos act like a decentralized computer, with programs stored on and executed via blockchains. Top Contenders:
Stablecoins sidestep the store of value debate by pegging their value to an underlying, such as the US dollar. Top Contenders:
These cryptos focus on scalability for the sake of rapid payments and are often run or created by a business. Top Contenders:
Born out of their namesake, memecoins are perhaps the easiest to criticize for lacking a key value proposition. Top Contenders:
In Exploring Cryptocurrencies, we dive into the seemingly-arcane world of cryptocurrencies to introduce and assess the space. We begin by contextualizing Bitcoin’s rise from the Global Financial Crisis to today, followed by an explainer on blockchain and how it works. We then investigate some of the nuances of Bitcoin and the popular questions we see in this space—is it a currency? Is it digital gold?
We also consider the value proposition of and valuation approaches for the cryptocurrency space. Finally, we review some of the largest cryptocurrencies and their underlying technology. We conclude with an assessment of the risks and potential long-term outcomes for cryptocurrencies.
From an investment perspective, cryptocurrencies are undergoing rapid change. Once viewed as uncorrelated asset, Bitcoin now trades very much like a cyclical, risk-on asset.
Sources: Bloomberg and Invesco, as of 31 December 2022. Past performance does not guarantee future results.
Common terms used in the cryptocurrency world:
A non-traditional, digital medium of exchange that uses cryptography to validate and secure transactions, typically through a blockchain. Importantly, some cryptocurrencies vary on this definition.
The first and most popular cryptocurrency that is a reward for participating in the Bitcoin blockchain network.
Any cryptocurrency other than Bitcoin.
A token is a crypto asset whose underlying value is based on another asset (e.g. gold or a title). This is different from a coin in that a coin’s value is not directly related to the value of an underlying asset. Unfortunately, “token” and “coin” are often used interchangeably, perhaps improperly.
A stablecoin is a cryptocurrency in which its market value is intended to be pegged to another asset, such as US dollars.
A digital ledger maintained by computers worldwide in a decentralized manner, where each “block” is a packet of data.
Users can participate in a blockchain network by verifying transactions and, in exchange, are rewarded with a particular cryptocurrency in a specified amount.
Wallets are where Bitcoin and other cryptocurrencies are, in essence, held for use. Note that wallets facilitate holding cryptocurrencies, whereas an address is specific to each blockchain and is used in transactions, serving as an identity.
Where cryptocurrencies can be transacted with other people or currencies for a fee.
An Initial Coin Offering (or ICO) is like an IPO but with digital coins. At the time that they became popular, they required no formal filings but served a similar purpose to equity securities. Today, they are almost non-existent.
As with Web 3, definitions may vary. The general idea of DeFi is to change financial markets and products operated by transparent crypto-based protocols rather than by financial institutions.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Unless otherwise stated, all data as at 31 January 2023.
This is marketing material and not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.