One of my key questions regarding the next era of cryptocurrencies and blockchain is: As regulations tighten, how will all that capital be allocated to digital assets and cryptocurrencies?
More than 90% of the world's financial and business assets are considered “domestic.” That is, they are owned and controlled by organizations and individuals located in the countries where they are bought and sold.
Currently, most crypto assets are bought and sold offshore (we estimate around 80% based on CoinGecko data). However, as more regulated opportunities open up, new capital will flow into these digital asset environments. However, I do not believe that there will be a huge new growth opportunity for cryptocurrencies.
If you read my column regularly, you know that I strongly believe that Ethereum will dominate like many other technology ecosystems. Ethereum is first and foremost a technology platform. Yes, ETH is a cryptocurrency, but its main demand driver is to be used as payment for transaction processing. Over time, I think ETH will largely follow the laws of supply and demand for processing power in this “world computer”.
The technology industry needs and thrives on standards that provide economies of scale and network effects. Ethereum won the programming standards war, fixed its scalability issues significantly, and has become the default choice. Digital assets generally exist within the Ethereum ecosystem.
The same rules do not apply to Bitcoin. Although Bitcoin is often lumped together, it is a true crypto asset, much like gold. People don't buy it with plans to use it. They buy it because of its rarity and value as an asset. Similar to gold, people don't expect Bitcoin to generate cash flow, only that it will increase in value due to its scarcity.
I also don't think recent efforts to add a layer 2 ecosystem to Bitcoin similar to what exists in Ethereum are unlikely to change this outcome. The Ethereum ecosystem has a huge lead, and Bitcoin users who want to make their assets programmable have been migrating it to “wrapped” Bitcoin on Ethereum for some time already.
In theory, there could be an infinite number of Bitcoins. It feels like it actually already exists. Litecoin, Dogecoin, and countless other meme coins and cryptocurrencies are nearly identical copies of Bitcoin. We don't have BrodyCoin at the moment, but we do offer free NFTs (get yours) here!).
Despite the fact that there is a virtually infinite supply of copies of Bitcoin, only one Bitcoin actually exists, and I doubt that is the one we already have. Masu. Let's focus on the gold analogy. Although gold is not in infinite supply, there are quite a few other precious metals. Silver and diamonds can be traded just as easily as gold.
However, despite the multiple options available, gold dominates the precious metals market. The global gold store market capitalization is estimated at $13.7 trillion. Silver's market capitalization is just $1.3 trillion. Since there is an order of magnitude difference between gold and its next replacement, we believe that Bitcoin will maintain an order of magnitude higher position than other alternative crypto assets.
I think this has some important implications for people preparing for the next wave of growth in these markets coming out of the regulatory era. The first is that inventing a new cryptocurrency is not necessarily the path to success. Bitcoin has its place and people want digital gold, so they will buy it.
Second, the world of digital assets should and can be much bigger than just a digital version of gold. Oil is essential to the global economy (for now), 10 times the size of gold, and generating $1.7 trillion in annual revenue (not to be confused with market capitalization). By creating something that consumers use or businesses need, the net new growth opportunity can be even greater. That space is much larger than holding reserve assets. So I'm looking for the next opportunity for real growth.
