3 signs the crypto revolution is just beginning

From Eric Wade, Analyst, Stansberry Churchouse Research:

You won’t hear about it in the mainstream media… but the crypto revolution is just getting started.

Right now, crypto headlines (and there are a lot fewer of them now than there were just months ago) are focused on the decline in the prices of cryptos – and bitcoin in particular. With bitcoin prices down around 66% since January, you see a lot about the death of bitcoin and cryptos altogether.

What you’re not hearing about is how investors, developers and entrepreneurs are all laying the groundwork for a tectonic shift in finance.

It’s easy to glance at a price chart and talk about the “collapse in bitcoin prices”. But it’s much harder to dig into the infrastructure and the investments that happen behind the scenes.

So today, I’m sharing three reasons why I believe the crypto revolution is far from dead – and in fact, how it’s just getting started…

1. More and more people are using cryptocurrencies

Cryptocurrency ownership is growing despite the plunge in prices.

Last month, the CEO of one of the world’s largest cryptocurrency exchanges, Coinbase, said the company has been adding approximately 50,000 users per day in 2018. That brings their global userbase to approximately 25 million. That’s up 250% over the fall of 2017.

Binance, another leading exchange, is growing even faster. It quadrupled its userbase in the first six months of 2018 to 9 million users.

All told, about 9% of grownups across 15 countries own or have owned cryptocurrency (per a recent survey by banking giant ING), and 25% of respondents said they “expect to own cryptocurrency in the future.”

The number of bitcoin wallets is also growing. Crypto company Blockchain.info publishes a graph showing the number of bitcoin wallets created since 2011. At the start of 2016, bitcoin users had created 5.4 million wallets (which are used to store, send or receive bitcoin) on the platform. By 2017, that number was 10.8 million. Today, there are nearly 28.5 million wallets, according to Blockchain.info:

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Cryptocurrency investors are following a well-established pattern. In 1962, American Sociology Professor Everett Rogers published the book “Diffusion of Innovations” that describes five distinct stages of technology adoption. First come the innovators. Then the early adopters. Following them are the early majority, late majority, and eventually, the laggards.

And the numbers back that up. According to Rogers, innovators and early adopters make up the first 16% of a population and right now, as I said above, we’re at 9% adoption.

2. Cryptocurrency capital investments are accelerating

Hedge fund managers and venture capitalists are pouring cash directly into cryptocurrency start-ups. It’s money that is meant to help businesses build out the new services, technology and hardware required to push cryptocurrencies into the mainstream.

The rate of investment in cryptocurrencies is accelerating, according to the cryptocurrency news site Coindesk. Venture capitalists invested about US$2.5 billion into the industry in 2017. In 2018, they’ve already invested more than US$4.5 billion. The chart below shows a clear acceleration in venture capital funding on a month-by-month basis from less than US$100 million per month to US$200 million per month or more:

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The number of cryptocurrency hedge funds is expected to grow by 50% in 2018 to more than 500, according to Crypto Fund Research. That’s an astounding number when you consider that cryptocurrency investments account for less than 0.1% of the assets invested by hedge funds.

Large corporations are also making their own investments in cryptocurrencies. For example, tech titan IBM has partnered with Stellar (XLM) to launch a so-called “stablecoin” (a crypto pegged to the price of the dollar) and to facilitate payment transfers in the South Pacific. Wire transfer company MoneyGram has partnered with the crypto Ripple (XRP) to reduce transfer costs. Microsoft has been offering cryptocurrency-based products to its large corporate clients since March 2016.

Even the owner of the New York Stock Exchange – Intercontinental Exchange – is launching its own bitcoin exchange. Called Bakkt, the start-up has joined forces with coffee giant Starbucks and tech company Microsoft, among many others, to build out an exchange and eventually a cryptocurrency payment network.

Initial coin offerings (ICOs) – a way for young cryptocurrency companies to raise funds much like initial public offerings (IPOs) in the stock market – are also accelerating. There have been 1,080 ICOs so far in 2018 – compared with just 873 in 2017. Combined, these ICOs have raised US$6.9 billion. Already, that’s nearly US$1 billion more than ICOs raised in 2017.

3. The ‘do no harm’ approach to government regulation

China banned cryptocurrency trading in 2017. Many people predicted other countries would follow suit. That hasn’t happened, though. While regulations are still pending in the European Union (EU), most developed nations have taken a “do-no-harm” approach to regulating cryptocurrency (beyond stamping out obvious instances of fraud and illicit activities).

There are two big reasons for this. First, it’s difficult, if not impossible, to stamp out cryptocurrency trading. China has seen this first hand. Regulators there forbid financial institutions from holding or trading cryptocurrencies. To get around the ban, individual traders have simply started using Virtual Private Networks (VPNs) – networks that give them the ability to make it look as if their web traffic is coming from a different country – to access offshore cryptocurrency exchanges.

Second, there are very real dangers to overregulating the industry. If the U.S. implements stricter cryptocurrency rules than the EU, for example, it could stamp out associated potential technological innovation. Entrepreneurs might relocate, and the country could cut itself off from new tax revenue streams. China has seen this, too. When it cracked down on cryptocurrency mining (the process of running computers to verify transactions and solve mathematical problems in exchange for a payout in cryptocurrency), miners simply moved their expensive computers offshore.

Compare that to the northern European country of Estonia, which has seen an economic boom thanks to its pro-crypto stance. Estonia in recent years has implemented favorable regulations and crypto tax rules which created a business-friendly environment drawing crypto startups, mining companies, and ICOs.

In short, the amount of capital and talent that’s entering the cryptocurrency industry is staggering. Governments don’t want to turn away those investments.

Look beyond the headlines

So don’t let anyone convince you the crypto bubble has burst.

We’re witnessing the birth of several transformative technologies. This will be one of the greatest bull markets of our lifetimes. And I believe the best is yet to come.

Good investing,

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Eric

Crux noteTo hear more of  Eric’s insights, make sure to sign up for the free daily e-letter Asia Wealth Investment Daily here.

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