Stores of Value
These cryptos seek to offer methods of storing value securely through a crypto, yet their values are quite volatile. Top Contenders:
- Bitcoin (39.61%)
- Litecoin (0.68%)
Article
An overview of major cryptocurrencies
10 April 2024
Key takeaways
Cryptocurrencies are a poorly understood but rapidly growing market. In our view, bitcoin benefits primarily from name recognition and its limited supply.
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 more 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 see cryptocurrencies as a new type of asset that is purely digital, with a host of new language and terminology to describe their inner workings. As digital assets continue to grow, we believe they deserve review.
Cryptocurrencies: an overview
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 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 at the end of 2017. After that bubble popped, cryptocurrencies weren’t back in vogue until 2020.
The development of cryptocurrencies
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 tens of thousands of cryptocurrencies in existence, and millions of other digital assets.
Figure 1. Cryptocurrencies come in many different forms and are built for varied purposes
* Market Share indicates the relative share of the market capitalization of the cryptocurrency universe, including both coinsand tokens.
†As we discussed earlier in this deck, 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.Danceand Invesco as of 1 March 2024. Cryptocurrency count is sourced from CoinMarketCapand CoinGecko.
Software Platforms
Such “software” cryptos act like a decentralized computer, with programs stored on and executed via blockchains. Top Contenders:
- Ethereum (19.26%)
- Cardano (1.27%)
- Solana (0.67%)
Stablecoins
Stablecoins sidestep the store of value debate by pegging their value to an underlying, such as the US dollar. Top Contenders:
- Tether (7.53%)
- USD Coin (5.00%)
- Binance USD (1.85%)
Payments-Focused
These cryptos focus on scalability for the sake of rapid payments and are often run or created by a business. Top Contenders:
- BNB (5.12%)
- XRP (2.11%)
Memecoins
Born out of their namesake, memecoins are perhaps the easiest to criticize for lacking a key value proposition. Top Contenders:
- Dogecoin (1.17%)
- Shiba Inu (0.57%)
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 an uncorrelated, fringe asset, Bitcoin is now seeing increased attention following the launch of spot bitcoin exchanged traded funds in the United States. As the asset has grown in traded volume, it has seen its behavior evolve to be more like a cyclical, risk-on asset.
Figure 2. Bitcoin correlations tend to be understated
Sources: Bloomberg and Invesco, as of 29 February 2024. See page 42 for index definitions. Past performance does not guarantee future results.
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Glossary of terms
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.
- Decentralized Exchange – Users are matched with buyers/sellers algorithmically. Such exchanges tend to be less liquid compared to centralized exchanges but are generally more secure and involve lower fees.
- Centralized Exchange – Users create an account with an exchange which typically holds their cryptoassets. These are considered more liquid and regulated, but less secure as the exchange acts as your custodian and can be hacked.
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.
Investment risks
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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.
Important information
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Unless otherwise stated, all data as at 29 February 2024.
This is marketing material and not financial advice. It is 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.
Views and opinions are based on current market conditions and are subject to change.
