Bitcoin: Have Cryptocurrencies Become Legitimate Market Assets?

In the last few years, one of the biggest stories to hit the financial markets is the rise of Bitcoin, which is a blockchain-based digital currency that can be used to exchange in global transactions. 

For many, these cryptocurrency is an asset that is both mysterious and uncertain. But now that we have seen major financial institutions accept its use, it seems almost certain that Bitcoin and the other cryptocurrencies have found themselves a position in the future of the financial markets.  To gain a sense of how quickly Bitcoin has become a legitimate asset, consider the chart below:

Here, we can see that annual car sales in the United States required 60 years to reach the $100 billion mark.  It took the world’s largest company, Apple, Inc., 32 years to reach that same mark. For Bitcoin, this took a mere six years – and this does not even take the values of the other common cryptocurrencies into consideration.

That is quite a lot of value creation in a very short period of time.  It also shows the ways Bitcoin acceptance into the mainstream has actually shown very few limitations when viewing things from the historical perspective.  

Global Currency Alternatives

One of the reasons behind the meteoric rise Bitcoin lies in the fact that blockchain-based transactions do not need to be filtered through the fiat currency systems enabled by governments.  This ultimately puts more freedom in the hands of the consumer, and this has helped cryptocurrencies find a major audience. In the chart below, we can see that this acceptance of Bitcoin has been both widespread and diverse:

Last year, most of the growth in cryptocurrency investment was seen in emerging Asia, Nigeria, and South America.  China accounted for a large majority of this growth, and this is not entirely surprising given the tight restrictions that are placed on foreign exchange in the Chinese Yuan.  If nothing else, this highlights an inherent need for cryptocurrencies around the world.

Investments and Risks

Of course, any time we are dealing with a market that is as new as Bitcoin and the cryptocurrencies there will be a certain amount of risk that is tied to its investment avenues.  In the chart below, we can see some of the Bitcoin “crashes” that have already taken place during its short history.

Make no mistake about it, these are some of the biggest declines in the history of the financial markets (when viewed in absolute terms).  These declines represent significant drawdown for those heavily invested, and each of the “crashes” seen during Bitcoin’s history have erased colossal amount of investment capital for those bullish on the space.    

This is why it is important to use conservative positioning tactics whenever there are new investments in the cryptocurrency space.  In the chart above, we can see that drawdown can be significant in these assets. The biggest collapse was seen in 2011, where prior rallies were followed by losses of 93%.  Any investor that was overleveraged or simply not positioned for this type of decline would have been forced to handle substantial losses. But this can be avoided with conservative positions in smaller trading sizes.

Conclusion: The World of Cryptocurrency Is Just Beginning

Whether a person is invested or not, it is difficult to argue with the idea that cryptocurrencies will likely have a long future ahead in the world of finance.  Cryptocurrency has a wide range of applications and the ability to make global transactions without the need for exchanging fiat currencies. Rapid growth rates suggest that this is an exciting time for digital assets, and this should be the case for years to come.