Six Trends To Understand Cryptocurrency Assets from Silicon Valley

From the latter half of 2020 to the first half of 21 years, major financial institutions and tech companies entered the crypto-asset market in a competitive manner. Amid rising expectations for the mainstreaming of crypto assets, the market capitalization of the crypto assets market temporarily reached $ 2.5 trillion (about 270 trillion yen) in the first half of May.

Although multiple factors have combined since mid-May and the crypto asset market has plummeted by more than 50% at one point, its current market capitalization is still more than five times that of a year ago. In addition, new use cases such as Defi (decentralized finance) and NFT (non-fungible token) have made rapid progress, and their momentum has not diminished. Meanwhile, state-level news such as China’s crypto-asset regulation and El Salvador’s fiat currency in El Salvador has caused media turmoil.

What’s Happening In The Confusing Crypto Industry Now?

After gaining experience in the US financial and tech industries, I am now in the blockchain industry, where the two industries meet. Blockchain is a mechanism that allows you to share correct transaction information on a decentralized network and is applied in various fields including finance. In this column, I would like to introduce the world of next-generation finance that I have directly observed and experienced while working at the San Francisco headquarters of the blockchain development company “Ripple”.

In this first installment, let’s talk about six trends to understand the “now” of the crypto-asset industry.

Trend 1: Large Companies And Financial Institutions Enter The Crypto Asset Market One After Another

Why did big companies start competing in the crypto industry? These trends can be roughly divided into two.

• Utilization for investment and financial purposes

Until now, the crypto asset industry has been centered on individual investors, but institutional investors’ interest in crypto assets has increased sharply over the past year. For example, it was reported that BlackRock, the world’s largest asset management company, has incorporated Bitcoin futures into multiple funds, and Morgan Stanley has begun offering Bitcoin funds to wealthy customers.

Inflation risk increases as countries issue large amounts of fiat currency as a stimulus package and maintain low-interest rates due to the new coronavirus, which is the traditional “60/40 portfolio” (60% stocks, 40% bonds). There was widespread concern that the expected return could not be obtained. Therefore, even among institutional investors, crypto assets, which are resistant to inflation and have a low correlation coefficient with traditional assets, have begun to attract attention as a new asset class (type of investment target assets).

In addition, pioneering major US companies such as Tesla and Square have begun to allocate some of their balance sheet cash to Bitcoin as a financial strategy. MicroStrategy, a U.S.-listed company that was the first to invest in Bitcoin, held a Bitcoin conference for companies, and it is natural that it is a responsibility to shareholders to consider Bitcoin as a part of corporate finance. Shake.

In this way, macroeconomic trends have begun to have a major impact on the Bitcoin market, with investors from around the world attending the Federal Open Market Committee (FOMC) meeting, which sets out US monetary policy policies in particular. I’m watching it every time.

• Development of investment infrastructure

The other is infrastructure development to make it easier for institutional investors and business companies to invest in crypto assets in earnest. One is the secure custody of crypto assets, an area that has grown exponentially in the last few years. Recently, it has attracted attention that BNY Mellon, the oldest bank in the United States, has announced that it will be the first major US custody bank to enter the crypto asset custody business.

The maturity of the derivatives market for risk hedging is also key. CME (Chicago Mercantile Exchange) and Bakkt have already offered Bitcoin futures trading, but CME has recently started trading Ethereum (ETH) futures, so it has been the choice of Bitcoin so far. It is expected that the investment of “Altcoin” (a general term for crypto assets other than Bitcoin) by institutional investors will accelerate in the future.

Furthermore, services for corporations such as fraud detection and risk analysis of crypto asset transactions to support institutional compliance (legal compliance) are becoming mature.

Trend 2: Wave Of Tokenization

Tokenization is a mechanism that allows ownership of tangible or intangible assets to be “tokenized” and traded on the blockchain. Tokenization dramatically increases transaction efficiency, subdivides ownership to improve liquidity, and ensures non-tampering and high transparency of ownership information. can do. 

Currently, it is estimated that about 1% of the world’s GDP is tokenized, but the World Economic Forum predicts that about 10% of GDP will be tokenized by 2015. In short, the token market is expected to grow tenfold in the next few years. The target of tokenization is endless, but the one that has been attracting attention recently is “NFT (Non-Fungible Token: Non-Fungible Token)”. 

NFT is the tokenization of a unique asset that cannot be replaced. It has a wide range of applications such as art, games, music, and collectibles, and is currently attracting increasing interest, especially in the entertainment field. NFTs are not new. 

In 2017, a game called CryptoKitties, in which cat mascots can be bred and bought and sold on the blockchain attracted attention. At the time, many underestimated it as “a toy” or “not practical,” but a few years later, the project team took ownership of a short video of a basketball player’s play scene, the NBA Top Shot. 

Developed a mechanism for purchasing and trading. It’s been about half a year since its launch in October 2008, and it has already sold nearly $ 500 million.

The big difference from CryptoKitties is that the NBA Top Shot user base has become mainstream. Some users of the NBA Top Shot use the service as part of their pure ownership and enjoyment, without even knowing that blockchain is being used as the underlying technology.

the field of art, it was talked about that the digital art NFT that was auctioned by digital artist Mike Winkelmann “Beeple” was sold for about 7.5 billion yen. Now, a category called “crypt art” has been created. 

In the past, it was difficult for digital artists to find a legitimate income opportunity because their work was easily copied, but with the introduction of the concept of “ownership” into the digital world, digital art is also physical. It is now possible to sell ownership in the same way as traditional art.

Furthermore, through secondary distribution through NFT exchanges such as “Nifty Gateway”, it is possible to have a mechanism in which part of the sales amount enters the artist as royalties even if the owner changes. It was. Recently, Twitter co-founder Jack Dorsey’s first tweet was auctioned off, and anything that is judged by the market to be “valued” is becoming NFT, not just art.

The latest total amount of NFT transactions has reached tens of billions of yen, and some of these tokenized assets are being used for borrowing collateral (collateral) in “DeFi (decentralized finance)”. .. Once assets are tokenized on the blockchain, they can be seamlessly applied to various fields such as DeFi, and the world of “Internet of Value ” that transcends the boundaries of money is expanding.

Trend 3: Concerns And Initiatives Regarding The Environmental Impact Of Crypto Assets

Due to the sharp rise in Bitcoin prices since the beginning of 2009, the annual power consumption of Bitcoin temporarily rose to more than 140 TWh (terawatt hours). This is more than the annual electricity consumption of Sweden as a whole, which means that it has increased more than 2.5 times at a stretch since 2019. This is because the rising price of Bitcoin has made mining more competitive, making mining more difficult and consuming more electricity.

Bill Gates, on the other hand, mentioned the environmental impact of Bitcoin. US Treasury Secretary Janet Yellen also criticized it as “an inefficient mechanism.” In addition, on May 12, Tesla CEO Elon Musk announced that he would stop paying Bitcoin for vehicle purchases due to concerns about the environmental impact of Bitcoin. 

It has had a great impact on the market, and there has been a lively discussion on environmental issues within the crypto-asset industry.

On the other hand, the number of crypto assets that do not use mining at all is increasing. As a typical example, “XRP Leisure”, which is the basis of the crypto asset XRP used by Ripple, where I work, in the international remittance network, uses a unique transaction approval algorithm to create a mechanism that allows decentralized approval of transactions without mining. It is adopted. As a result, annual electricity consumption is as low as 790,000 kWh (kWh), and consumption per transaction is only 1 / 120,000 compared to Bitcoin.

In addition, Ripple, Rocky Mountain Research Institute, and Energy Web (NPO) have partnered to form ” EW Zero .”We have developed a mechanism to accelerate the decarbonization of the blockchain. Specifically, any user or stakeholder who utilizes the blockchain can offset carbon dioxide (CO2) by purchasing a green power certificate, which can contribute to the decarbonization of the blockchain. With this mechanism, XRP Leisure became the world’s first decarbonized blockchain in October 2008.

Furthermore, in April 2009, the “Crypto Climate Accord”, which can be called the “Paris Agreement of the Cryptocurrency Industry,” was launched. It has set an ambitious goal of making all blockchains around the world 100% renewable energy by 2013. The decarbonization of blockchain should be discussed as an even more urgent issue in the future.

Trend 4: DeFi (Distributed Finance) Momentum

“DeFi” refers to a decentralized financial system based on smart contracts (contract automation) that do not involve intermediaries. For example, DEX (Distributed Exchange), where transactions are carried out without an intermediary, and decentralized crypto-asset lending and lending services are attracting attention.

The size of the DeFi market is often expressed in total value locked (TVL), which is locked to smart contracts, and at its peak in early May, it temporarily grew to over $ 100 billion (Etherium base and Binance). DeFi TVL total based on smart chains). Those who make money by allocating their crypto assets to high-yielding DeFi services are called “yield farmers.”

It is said that the explosive growth of DeFi will be greatly affected by the design of economic incentives such as the distribution of governance tokens, in addition to the maturation of the technology that supports it.

DeFi is also called “money Lego”, and it has the feature of “composability” that allows the composition of new financial services like combining individual DeFi applications with toy Lego. There is.

Ethereum has been the de facto standard as the basic technology of DeFi, but in order to solve various problems (scalability, high gas cost, etc.) that Ethereum has, Many new blockchain projects are emerging. Although Ethereum is moving to a new version called ETH 2.0 that solves many of these problems, competition for basic technologies in the smart contract field is expected to intensify in the future.

It seems that DeFi has been delayed in Japan, but recently a new industry group (Japan DeFi Alliance) has been formed, and it is expected that the movement will become more active in the future.

Trend 5: Chaotic Crypto Asset Regulation Status

Cryptocurrency regulation trends around the world are chaotic. In Switzerland, the decentralized ledger-related law came into effect in February 2009, clarifying the framework for handling digital tokens by financial institutions, and increasing the presence of crypto assets as a developed country. The Swiss government is actively working to attract foreign crypto assets companies to the so-called “crypt valley” city of Zug.

On the other hand, some developing countries are also moving to tighten regulations on crypto assets. Most recently, China has moved to tighten regulations on Bitcoin mining and trading, causing havoc in the market. In Nigeria, where 32% of the population has owned or used crypto assets and personal use of crypto assets is said to be the most widespread in the world, the central bank of the country and financial institutions are involved in crypto-asset transactions. It was controversial, banning the provision of services.

Recently, the Turkish government has also started to tighten regulations on crypto assets, and it was reported that the government will ban crypto assets altogether in India (then the ban changed to regulation). In the midst of such dark clouds, a bill recognizing Bitcoin as a legal tender was passed in El Salvador, South America, and attracted attention.

In the United States, while there was a positive move last year by the Office of the Comptroller of the Currency (OCC) to officially approve the possession and use of crypto assets by banks, the industry has not established a clear legal framework for crypto assets. It’s still confusing. Under the new administration, it is expected to create an advanced regulatory framework that promotes innovation.

In addition, international regulations are becoming stricter and more coordinated to counter money laundering, and the “Travel Rules”, which are a guideline for anti-manner and terrorist financing measures formulated by the Financial Action Task Force (FATF). The crypto asset industry is also required to respond to this. 

Travel rules require crypto service providers (VASPs) to perform customer verification at the same level as traditional financial institutions, which will have a huge impact on the crypto-asset industry depending on how each country responds in the future. May give.

Trend 6: “Netscape Moment” In The Crypto-Asset Industry

In April 2009, the direct listing of “Coinbase”, the largest cryptocurrency exchange in the United States, made the industry a “Netscape moment” of the cryptocurrency industry, and cryptocurrencies. 

The asset market was also booming every day. It is hoped that the IPO (initial public offering) of Netscape as a pioneer of Internet companies will be a milestone and that the same thing as the rapid expansion of the Internet industry will occur in the crypto-asset industry. It’s a feeling.

After listing, the market capitalization temporarily exceeded 7 trillion yen, which is comparable to the market capitalization of Mitsubishi UFJ Financial Group, which is ranked 9th in the market capitalization ranking of listed stocks on the Tokyo Stock Exchange. 

In the future, in addition to Coinbase, it is expected that first-generation crypto asset companies founded in 2012-15 will move toward IPO (initial public offering). 

In the US stock market, IPOs through SPACs (special purpose acquisition companies) are becoming more active and compared to before, so-called “Moonshot shares (not immediately profitable but grand and ambitious) The company) ”is beginning to create a soil that is easy to IPO. The IPO of crypto assets and blockchain companies may accelerate further in the future, riding on that wave.

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