The current rally in cryptocurrency prices is based on much stronger fundamentals than we saw in the previous rallies.
Many think that cryptocurrencies are only speculative asset class with no fundamental business or cash flows behind them. This is not the case. It’s important to understand that most of the well-established and well-known crypto currencies have a strong underlying business case. Such a business case is mostly unique with most of such cryptocurrencies.
Bitcoin is steadily establishing itself as a medium of exchange and store of value. It’s backed by a strong blockchain which in turn, supported by thousands of nodes and miners, ensure the network is safe and performs its function smoothly. It has emerged as a fully electronic sovereign platform with a global currency – Bitcoin.
This feature of Bitcoin helps it to eliminate some of the disadvantages of fiat currency world like – printing and logistic costs, counterfeiting and tracking.
Similarly ETH, the second largest cryptocurrency with its underlying blockchain and software Ethereum, is being successfully used in areas of Smart Contracts, Distributed Application and Decentralised Finance (Defi). Billions of dollars of assets are now parked in Defi network. XRP and Ripple have been solving the issues that we face in cross border remittances.
With usage of Ripple network and XRP the cross-border remittance transactions can be completed in seconds and at a fraction of cost than what we pay when using fiat currency and conventional banking networks.
In my opinion the usability of cryptocurrencies and its underlying technology is getting mainstream attention due to the issues that they solve in the current financial and banking world. This is the reason that past few months have seen continued buying not just in Bitcoin but other cryptocurrencies as well and prices crossing all-time highs on multiple occasions.
The actions by financial services regulators and central banks is also helping Bitcoin to maintain its price momentum. US Fed is expected to maintain low interest rates and continuous printing of the currency is resulting in a weaker US dollar.
This is increasing the number of investors who are diversifying their portfolio to include Bitcoin. This can be seen in the significant growth of number of new Bitcoin wallets that were registered last year.
The future of cryptocurrencies looks reasonably strong with expanding investor base
Bitcoin has performed incredibly well in the last three quarters due to higher expected returns as a consequence to its limited availability and higher price volatility. Prices surged 500 percent in 2020. Relatively low correlation of log normal price returns of bitcoin with equity index also supports diversification benefits of digital assets.
Several large corporate, financial institutions and banks have started diversifying their reserves and investment portfolio to include Bitcoin. This is expected to provide a hedge against inflation and also provide superior risk adjusted returns in the years ahead.
Futures contracts on Bitcoin have been launched on many exchanges and are seeing active trading and volumes. This gives traders advantages of hedging and doing arbitrage between spot and futures.
The future of cryptocurrencies looks reasonably strong with expanding investor base, more and more regulators recognising this asset class and emergence of fully regulated exchanges where cryptocurrencies can be traded and stored much more transparently and efficiently.
Arshad Khan is co-founder and CEO of Arabian Bourse Ltd
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