First Mover: $1 Trillion of Cryptocurrencies Shows Booming 'Asset Class'

It took just a few months for cryptocurrencies' market cap to double to $1 trillion. That compares with eight years for U.S. junk loans.

AccessTimeIconJan 7, 2021 at 2:28 p.m. UTC
Updated Sep 14, 2021 at 10:52 a.m. UTC
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Bitcoin (BTC) rose for a third straight day, pushing early Thursday to a new all-time high price above $38,000 and setting bullish traders' sights on $40,000.

"Momentum has been building over time, and it's anyone's guess where or when we might eventually top out," Mati Greenspan, founder of the foreign-exchange and cryptocurrency analysis firm Quantum Economics, told clients in a newsletter.

The gains came after a day of turmoil in Washington, D.C., during which supporters of U.S. President Donald Trump stormed the Capitol building and disrupted a congressional vote to formalize challenger Joe Biden's victory in last November's presidential election. The shocking images prompted world leaders from the U.K., European Union and Canada to condemn what they characterized as an unacceptable attack on democracy. U.S. lawmakers later reconvened and certified the election result early Thursday. 

The upshot, according to Bloomberg News, is that global investors are now focusing on the likelihood that a Biden White House, backed by a legislature controlled by his Democratic Party in both chambers, could more easily pass new U.S. stimulus measures. Bitcoin prices quadrupled in 2020 as a growing number of big Wall Street investors said the cryptocurrency could serve as a hedge against the potential negative impact on the dollar's value from trillions of dollars of fiscal and monetary stimulus.  

In traditional markets, European and Asian shares rose on Thursday and U.S. stock futures pointed to a higher open. Gold weakened 0.1% to $1,916 an ounce. 

Market moves

Earlier this week, First Mover flagged the possibility that the total market capitalization of all cryptocurrencies combined could surpass $1 trillion within a few months. 

Turns out it only took a few days. The total market value of bitcoin and all the other digital tokens and stablecoins pushed into the trillion-dollar zone late Wednesday for the first time. As reported by CoinDesk's Zack Voell, the industry had topped out at $760 billion during the last big bull run in late 2017.  

The milestone could prove another catalyst for big Wall Street funds to look more seriously at cryptocurrencies for a potential portfolio allocation. It's getting harder and harder to argue, as the big bank and brokerage firm Goldman Sachs did last May, that cryptocurrencies are "not an asset class." The sums are getting too big to ignore.   

“Is it frothy? A little bit in the short term,” Qiao Wang, co-founder of decentralized finance (DeFi) accelerator firm DeFi Alliance, told Voell. But is it ridiculous? “Nope.”

One of the biggest stories in finance during the last decade was the rapid (and concerning) growth in so-called leveraged loans, which are big loans that are arranged by Wall Street firms on behalf of junk-grade or even unrated companies and then typically apportioned to other banks, sold off to investors or even transformed into new triple-A rated bonds via the alchemy of structured finance.

Headlines abounded when the outstanding amount of U.S. leveraged loans grew to about $500 billion in late 2010 and then doubled to $1 trillion by early 2018.

Cryptocurrencies have now traversed that chasm in just a few months.  

“The $1 trillion mark cements cryptocurrency as an investable asset class that no longer sits on the fringes of traditional finance as a toy for retail investors,” Jack Purdy, of the crypto-market analysis firm Messari, told Voell. “It demonstrates that this asset class is large enough to absorb large orders like we’ve seen recently with the slew of institutions entering over the last few months.”

crypto-market-cap-new-new

Bitcoin, the original cryptocurrency and the largest by far, represents about 70% of the industry's total market capitalization. So the push toward the $1 trillion milestone came largely on the heels of bitcoin's rally over the past year

Bitcoin now has a market capitalization of about $700 billion, up from about $130 billion at the start of 2020. According to the website fiatmarketcap.com, bitcoin's outstanding value would rank it as the 16th biggest global currency, just ahead of the Mexican peso and one rung below the Russian ruble.  

And if bitcoin were a publicly traded company, it would rank as the world's eighth-largest, according to another website, AssetDash, well behind Apple's $2.1 trillion valuation, Amazon's $1.6 trillion and Facebook's $751 billion valuation, but far in excess of the big U.S. financial institutions like Visa ($468 billion), JPMorgan Chase ($401 billion) and Citigroup ($135 billion).

If the recent trend is any indication, bitcoin could keep climbing these ranks.  

Bitcoin watch

A rising spread between the implied volatilities on bitcoin and ether options might signal a rotation toward alternative cryptocurrencies.
A rising spread between the implied volatilities on bitcoin and ether options might signal a rotation toward alternative cryptocurrencies.

Options traders are signaling a looming change in digital-asset markets – from a focus on bitcoin to relatively undervalued ether (ETH) and alternative cryptocurrencies.

The spread between the six-month implied volatility (IV) for ether and bitcoin – a measure of the expected relative price volatility between the two – has risen to a record high of 46%. That surpasses the previous peak of 45% seen on Feb. 21, 2020, according to data provider Skew. The three- and six-month spreads have risen to an 11-month high of 32% and 23%, respectively.

The widening of the IV spreads indicates that the market expects ether and other alternative coins to chart bigger percentage moves than bitcoin in the near term.

“Traders are expecting increased volatility for ether relative to bitcoin,” Skew CEO Emmanuel Goh told CoinDesk. “This is consistent with decreasing correlation and a pick-up in interest across alternative cryptocurrencies.”

Some may argue that implied volatility reflects investor expectations of price turbulence and may not turn out to be reflected in the charts going forward. However, historical data show that implied volatility spreads are reliable indicators of upcoming shifts in the market. For example, the ether-bitcoin IV spread nosedived in the second half of September 2020, portending a big shift toward bitcoin. And the largest cryptocurrency delivered, outperforming most other cryptocurrencies by a significant margin in the final quarter of last year, with a 168% rally. 

- Omkar Godbole

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