The Cryptocurrency Market

The Relationship Between Cryptocurrencies and Other Markets

Cryptocurrencies are still better classified as a new asset class of technology. Bitcoin is just ten years old, and the future position of cryptocurrencies in global markets is still unknown. It has yet to experience a financial crisis, and its main application is still being developed.

There hasn't been much evidence of a direct connection with other asset classes so far. There are a few hypotheses on how this will play out in the future. In this guide, we look at how cryptocurrencies have evolved as an asset class, the functions they perform, and the role they will play in global markets in the future.

The Cryptocurrency Market's Growth

Bitcoin and a few other cryptocurrencies were invented by a small group of visionary enthusiasts for most of their early growth. Until recently, it was not considered a legitimate asset class.

Analysts like Chris Burniske and Jack Tatar contributed significantly to cryptocurrencies being recognized as a distinct asset class. Burniske and Tatar both published papers arguing for the inclusion of cryptocurrencies as a key component of an investor's portfolio, as well as templates for analyzing them.

There was a reason why cryptocurrencies were not regarded as a legitimate asset class in their early stages. Although the network was launched in January 2009, it wasn't until October of that year that the first attempt at an exchange rate was made by New Liberty Standard, which priced 1309.03 Bitcoin at one dollar.

It wasn't until May 22nd, 2010 that the first transaction with a real-world retailer occurred, when two Papa John's pizzas were bought for 10,000 Bitcoin. This transaction became well-known, and Bitcoin was priced at about $0.0025 at the time.

After these incidents, Bitcoin's value has skyrocketed, with rates above $50,000 and market capitalization exceeding $1 trillion. The Bitcoin network now handles about 300,000 transactions every day, with daily values exceeding $1 billion. Thousands of other cryptocurrencies have been created and are in use in a variety of industries.

The relationship between cryptocurrencies and other asset classes is still in the early stages of growth. Since Bitcoin accounts for the vast majority of the cryptocurrency market capitalization, its behavior in comparison to other asset classes is the best predictor of how the cryptocurrency market as a whole would act.

Bitcoin and Cryptocurrencies as Assets of Store of Value

What is an asset class, exactly?

• Capital asset class - This asset class produces cash flows and is normally priced based on the present value of such cash flows.

• Consumable/transformable asset class – These commodities are usually consumed or transformed for industrial purposes, and their value is determined by supply and demand.

• Store of value assets class - Assets in the store of value category do not produce profits and are not consumed; instead, they are used to pass value into the future.

Different assets seldom fit neatly into a single asset class. There is often overlap between the three groups, with asset classes often representing two or three of them. Precious metals like gold and silver, for example, are often used as both a store of value and a consumable commodity. Given the production of potential cash flows, fixed income and equities better fit into the capital asset class. Thanks to its potential to produce rental income, real estate is classified as both a capital asset and a store of value asset.

Which asset class does cryptocurrency belong to the most? This is a contentious issue that evolves as the cryptocurrency community reflects on and establishes various positions for cryptocurrencies. Since cash flows are rarely produced from holding the asset, it is best suited to the capital asset class.

It may be argued that airdrops and forks have cash flows, but these are typically insignificant in value and can cause price crashes in the primary asset. Cryptocurrencies may certainly be classified as consumable properties. In a blockchain ecosystem, several cryptocurrencies are used to perform critical functions.

Bitcoin's most common use right now is as a store of value. Bitcoin's supply and issuance model is designed to be a deflationary currency. Bitcoin's value is expected to rise in relation to goods and services over time, making it a strong candidate for use as a store of value asset.

As a result, cryptocurrencies as an asset class can be expected to behave similarly to other store of value assets in terms of price.

Financial Asset With No Correlation

Cryptocurrencies have also formed a strong use case as an uncorrelated financial asset. Adding uncorrelated assets to an investor's portfolio is thought to have a diversification advantage. Cryptocurrencies are uncorrelated with every other major asset class, making them a compelling asset for this application.

Since cryptocurrencies are heavily correlated, it's not a good idea to try to diversify a portfolio solely with cryptocurrencies. As the cryptocurrency asset class matures, it is likely to become more associated with other major asset classes, and its association with other markets will become more obvious.

Regulation's Role

The importance of regulation in the cryptocurrency asset class is being debated. Governments and regulatory agencies are debating how to regulate this asset class. Governments, such as Malta's, have developed regulatory structures that can serve as a model for governments overseeing the cryptocurrency sector.

The properties of cryptocurrencies are likely to shift as the cryptocurrency asset class's regulation evolves. Cryptocurrency assets currently have a high level of volatility and a lack of liquidity. Due to a lack of liquidity, this can result in market crashes and spikes.

The cryptocurrency market is unsuitable for institutional investors due to its lack of regulation. It clearly exposes institutional investors to too much risk. They can't put their clients' money on the line in unregulated markets.

However, as the asset class becomes more regulated, it will become more appealing to the aforementioned investors. The vast sums of money behind institutional investors would bring a lot of liquidity to the market, and the trading climate would possibly become even less volatile. For institutional investors, it simply entails too much risk.

Conclusion

The relationship between cryptocurrency and other big asset classes is still a mystery. This is mostly due to the cryptocurrency market's early stages of growth. The market is still figuring out how to best fulfill its purpose.

The most common use case for cryptocurrencies at the moment is as a store of value, implying that they may behave similarly to other store of value assets such as gold. Since cryptocurrencies are not associated with other major asset classes, they offer substantial diversification benefits to investors when putting together a portfolio.

As the market develops, there will almost certainly be more overlap between cryptocurrencies and other major asset classes. The asset class's growth is heavily influenced by regulation.

It will create a favorable atmosphere for institutional investors with significant sums of capital to engage in the market by controlling the market. This would bring a large amount of liquidity to the cryptocurrency market, which would likely make price fluctuations less unpredictable.