(Note: this article is directly a response to Joe’s article, which is bearish on Cryptocurrency. This viewpoint is bullish on crypto).
Cryptocurrency in the past few months has been exploding. While many are excited about the astronomical gains, its led to many skeptics questioning the entire crypto space. They are partially correct, however the entire cryptocurrency space should not be discounted, and in fact there should be more buy-in once this bull run has finally simmered down.
If you are new to cryptocurrency, or need a refresher on how it works, I highly recommend you watch my Intro to Crypto video, linked here.
The Power of Decentralized Finance
Perhaps one of the most exciting parts of crypto is the increasingly popular Decentralized Finance, or “DeFi”. Decentralized finance leverages crypto in order to create financial platforms and provide services without a centralized authority. In other words, you can get a loan or a savings account without the need for a bank.
The current services offered by DeFi include, but are not limited to:
- Savings Accounts
- Decentralized Trading
- Interest Rate Pools
How much money is in Decentralized Finance? Currently, at the time of writing, there is over $66 billion of value locked into different DeFi services. Below is a graph from https://defipulse.com/, showing the amount of value locked into DeFi since it started getting popular in mid 2020.
For those that say this increase in value is just from crypto market caps increasing the past few months, below is a graph showing the amount of Ethereum locked into DeFi
While not as dramatic an increase as the USD graph, it shows that there is an enormous amount of growth and confidence in the DeFi space.
In Joe’s article, he insists that crypto is only used for speculation and not for its intended purpose. This is wrong, and DeFi proves it.
Why DeFi is important
This is great, but why is DeFi important? Why not just use traditional financial institutions to get a loan, or a savings account? While in its early stages, DeFi helps cryptos ultimate goal of democratizing finance.
As we have written about before, banks and credit providers are now using digital footprint data to determine whether borrowers are qualified for loans or not. This can be very problematic for people trying to obtain credit with minimal credit history, or without a “positive” digital footprint. This often causes minorities and people from poor communities and countries to not have the same access to credit as others do.
With decentralized finance, none of this matters. If you are able to put up the required capital for a Decentralized Loan, you can get the loan. No questions asked. There is no credit pull, no income requirements, no extra data pulls to examine the borrower. In fact, you do not even need to reveal your name. With an ETH wallet, you are able to have access to a number of DeFi applications in just a few short steps.
(If you need help setting up your first crypto wallet- check out my video here!)
Market Capitalization Comparison
When people see the enormous price increases in cryptocurrencies across the market, they are quick to call over valuation and say the market is going to go to zero. What is interesting, however, is to examine the market capitalization of other assets.
Market Capitalization is the total value of a certain asset class. For example, the total Market Capitalization of a stock is the current stock price x the total amount of stocks outstanding. For further explanation on Market Cap, click here.
Looking at the total market capitalization of all of cryptocurrency, it is currently at $1.73 Trillion (coinmarketcap.com). That is a significant number, however when comparing the total market capitalization of the US Stock market ($49 Trillion!), it’s relatively tiny.
Now, this is not a perfect comparison. There are tons of differences between a stock and a cryptocurrency. However, the purpose of this comparison is to show just how tiny the crypto market actually is. Though it dominates headlines, there is not that much money in cryptocurrency right now. While we certainly are at a short-term bubble, there is certainly room for continued long-term growth in the space.
Traditional Theories Need Not Apply
Some theories of economics and finance almost are universal: asset price goes up when people want to buy, it goes down when people don’t. However, much of the cryptocurrency market (and even the modern stock market) have challenged traditional financial theories.
Why did cryptocurrency continue to go up despite everything going against it? People argue that Bitcoin has no real value, yet adoption continues to increase (even with the announcement from Tesla that they are reconsidering their Bitcoin adoption).
I would argue that since cryptocurrencies are a new asset class with a new set of rules, we need to re examine the theories that we apply to traditional assets and see if they work for cryptocurrency.
Yes, the meme of “crypto only goes up” is not true. Crypto CAN go down. However, comparing a cryptocurrency’s price movement to that of a stock, for example, just is not an apt comparison.
Crypto is Here to Stay
Though crypto has its fair share of issues (scam coins, insane price fluctuations, etc), to disregard the entire space and assume that it will not be around in the future is asinine. Even with the current crash, crypto adoption continues to increase. What was once a weird online way to make money is being legitimized by institutions around the world.
While you can be bearish in the short term for cryptocurrency, in the long run cryptocurrency is here to stay.