The cryptocurrency market has undergone significant growth in 2017–2018. The macroeconomic trends fueling this growth can be found here. Why are individuals so interested in the emerging cryptocurrency market? If you developed an interest in the cryptocurrency space in 2017, I would wager some Bitcoin that you fall into one or more of these three categories. Individuals become interested in cryptocurrency from a financial markets lens, a technological lens, and/or a psychological lens.
My gateway into crypto came from a financial markets perspective. Being a former derivatives financial analyst at Vanguard, the trading aspect of the fast paced, volatile, fragmented, and new crypto markets enticed me to get involved in 2016. It felt like traveling back in time and experiencing the stock markets 30 years ago, except this is the crypto edition.
Entrance Avenue 1: Financial Markets
Cryptocurrency is turning heads in the financial services space because of the marketplace dynamics similar to equities. Prices of crypto tokens are set by supply and demand and traded across numerous exchanges. Herein lies opportunity for arbitrage, speculation, and investment in a growing list of cryptocurrencies that aim to utilize the blockchain technology in some way. New and fragmented markets are low hanging fruit for talented quantitative traders. Furthermore, the biggest reason for financial interest is that the investment returns are absolutely mind-boggling. Bitcoin has shown an approximate 1,500% increase in 2017, while Ethereum has skyrocketed over 10,000%. There are also less known, and more risky, crypto tokens emerging now which offer even higher potential returns.
Investors also have the opportunity to invest and contribute to projects they believe in through the ICO, which is an innovative way for startups to raise capital at an early stage. This fundraising method is novel for investors because it eliminates barriers to entry, thereby closing the gap between retail and institutional investors. This levels the playing field to some extent, even though better terms are typically offered to investors with deeper pockets. Imagine if you could invest in early stage Uber through an ICO. Boom. Game changer. It’s no surprise that this type of environment would attract finance and investment professionals.
EDIT: Here’s a deeper analysis on blockchain disruption within financial services, by yours truly.
Entrance Avenue 2: Technology
It is also no secret that the blockchain technological innovation is at the crux of the cryptocurrency industry. This distributed ledger technology creates a more efficient and trustworthy way for people and companies to store information in a decentralized way. Once a tech savvy person catches wind of this technology, it’s game over and most geeks will be hooked. The cryptographic revolution has attracted developers and many people with a nose for technology. Specifically, developers can now build decentralized applications (dApps) on top of existing platforms such as Ethereum, instead of operating a centralized server for one’s web application.
In addition to data transparency, integrity, and security, this allows for certain efficiencies to be gained. For example, there is no need to integrate Stripe or PayPal to accept funds from users. All users can send/receive Ether as a common payment means. Additionally, users do not actually need to sign up because they already have an account; their public/private keys are binded with their user session. Most importantly, blockchain based applications are open source. This is crucial because you only have to trust the technology itself — not the tech and finance companies who may or may not be stealing and selling your data. This brings me to my next point: the psychological view on cryptocurrency.
Entrance Avenue 3: Psychology
Individuals who advocate freedom and despise the control of government and large corporations can find consolation and solace in cryptocurrency. If you do not believe banks should have control over your financials, then cryptocurrency is for you. Cryptocurrencies, including Bitcoin, act as a store of value and allows the owner to be completely responsible for the security of their funds. Some people claim that Bitcoin was created in order to incite peaceful anarchy and to rebel against corruption in our modern society. Libertarian and anarchist ideologies have been meddled with cryptography to create a new way of thinking; crypto-anarchism. Furthermore, another issue that cryptocurrency attempts to tackle is privacy. Cryptocurrencies such as Monero have emerged that claim to be completely private, protecting the account owner’s identity online. If you are someone who gets paranoid thinking about the NSA spying on you, or have other reasons to stay anonymous, then cryptocurrencies have tremendous value.
EDIT: Entrance Avenue 4: Hype, FOMO, word-of-mouth
Distributed ledger technology and the cryptocurrency markets act as a virus on one’s brain. Once someone understands the fundamental concepts, they are intrigued and want to learn more. The unprecedented returns in the cryptocurrency market are driving attention from the investment community. From a technological perspective, the innovative way to store and exchange information and build dApps is also turning heads. Furthermore, cryptocurrency attempts to bring power away from governments and large corporations and return it to the people. At an individual level, these are the main reasons why I believe the blockchain and cryptocurrency industry is gaining so much traction.