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$1 Trillion Market: How Does The Crypto Market Compare To Other Financial Markets?

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Crypto market watch

According to data from CoinGecko, the overall cryptocurrency market capitalization has reached a whopping amount of  $1 trillion in value, just a few days into 2021. This is another huge milestone for the budding crypto space, with over 6,124 digital assets currently listed. However, despite this landmark, the cryptocurrency market’s total capitalization compared to other financial markets is still a small fraction. Commodities such as gold currently boost a market capitalization even bigger than the whole crypto space.

Leading the race is Bitcoin, as the absolute leader in terms of its $674 billion market cap, sucking up to 68.5% of the market, followed by Ethereum whose market capitalization is of $135 billion, that’s 13.3% of the market dominance as at the time of writing this.

Since the end of Q2 of 2020, Bitcoin and the altcoins market have garnered unprecedented interests from a growing list of Institutions as well as a new influx of retail investors, with no sign of stopping. Huge investments have been flowing into crypto from firms like MicroStrategy, who has bought up over 70,000 bitcoins with future plans to buy more, and London-based asset manager Ruffer Investment, who dumped more than $740 million into bitcoin toward the end of 2020.

The $1 Trillion zone shows cryptocurrency as a potential safe-haven asset and a hedge against inflation that no longer sits on the marginal part of traditional finance and having the potential for greater risk-adjusted returns compared to traditional investments. This milestone enables the cryptocurrency market to have enough liquidity to deploy large sums of transactions, but still early enough for a 10x return.

The last time the cryptocurrency market has witnessed such a bullish rally was in 2017. When the overall cryptocurrency market cap reached around $829 billion before a deep plunge that resulted in a two year bear market. 

But how does the cryptocurrency market rank compared to other financial markets like the Forex and Stocks market?

Comparison of these three financial markets will clearly show that the cryptocurrency market is still nascent. Although the crypto market is just 12 years old, it still has enough room for big growth.

In November, 2020, the total stock exchanges have a combined market capitalization of $85 trillion USD by data from Spendmenot. Majorly, the stock market consists of New York Stock Exchange, NASDAQ, London Stock Exchange, Tokyo Stock Exchange as well as others. The New York Stock Exchange, however, is the largest stock exchange in the world, with an equity market capitalization over $25 Trillion in April 2020.

According to Brokernotes, the total market capitalization for the Forex market is around $1.93 quadrillion, which is 2.5X larger than the global GDP.  Also, $5.3 trillion dollars per are traded daily in the Forex market with his major transactions happening around 7 currency pairs; EURUSD, USDJPY, GBPUSD, AUDUSD, NZDUSD, USDCAD, USDCHF and while various transactions occurring across several crypto assets.

Both Crypto, Stocks and Forex markets are controlled by the market forces. The Forex market has the highest liquidity compared to others and its daily volume is about 53 times greater than the New York stock exchange.

Market capitalization is a well-known key metric for traditional securities. In the Stocks market, it consists of multiplying the amount of outstanding stock shares by the current stock price. While in the cryptocurrency market, is the circulating supply of tokens multiplied by current price.

Stock markets have always been analyzed via financial metrics and ratios. Measures like price-to-earnings ratio, earnings per share, the current ratio, earnings growth etc. Most cryptocurrency startups or companies do not publish their financial statements, so the market capitalization provides a quick and easy check on how valuable a cryptocurrency is while other key metrics are volumes, futures premium and top traders’ position at major exchanges.

An article released by Conhen & Co on October, 2020 in which several experts in the crypto space at Cohen Client Conference discussed the maturity of the cryptocurrency marketplace and ecosystem. On the scale of 1-10, the panelists response ranged from 2 to 6.

Cryptocurrencies are here to stay. Recently, the Office of the Comptroller (OCC) of Washington recently published a letter allowing Federal Chartered Banks and Thrifts to allow stablecoins i.e USD Coin (USDC) as a mainstream payment medium for all forms payment and transactions. This is a significant indicator that the cryptocurrency market is still a baby growing into maturity in terms of growth and diversification.

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Market Watch

Jack Dorsey‘s Square to develop open source Bitcoin mining

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Jack Dorsey Bitcoin

On Friday, October 15, Twitter CEO Jack Dorsey announced that American fintech company, Square, would be looking to get into Bitcoin mining. Jack Dorsey who is also Square’s CEO announced this on Twitter which subsequently sent waves through the bitcoin market, surging its price to almost a record high, rising over $62,000 over the weekend. According to the Twitter boss, Square is looking to building an open source Bitcoin mining system that would be available to individuals and businesses.

Sharing his thoughts further on the initiative, he stated that “Mining needs to be more distributed” and that “the more decentralized [mining] is, the more resilient the Bitcoin network becomes. He also mentioned the apparent inaccessibility of mining stating that “Bitcoin mining should be as easy as plugging a rig into a power source.

Dorsey also believes that bitcoin mining “needs to be more efficient and that “clean and efficient energy use” would be undoubtedly beneficial to the digital currency in the long run.

Dorsey ended the thread by saying that a “technical investigation would be undertaken by a Square team led by Jesse Dorogusker, Square’s hardware lead. If successful, this initiative would be another of Square’s bitcoin focused projects which includes a Bitcoin hardware wallet.

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Learning Guides

Understanding Speculation and Crypto Volatility

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Everyone who dabbles in the crypto industry learns almost immediately that the market is very volatile and oftentimes things can change very quickly. That volatility is the fundamental reason why some investors make absolutely stunning gains in so short a time and others lose a lot of money as well. Trading in crypto is one of the riskiest ventures any person can undertake and as they say, it’s not for the faint of heart. The risks can be mitigated of course and sometimes depends specifically on the coin or crypto asset being traded on, barring general market trends.

Nevertheless, to get to the bottom of the volatility concept, one must understand speculation in the market. To start off, the concept of speculation isn’t limited to cryptocurrencies, on the contrary, speculation has existed for as long as economics and trading has. But it is worth saying that speculation is often a feature of novel sectors, assets, commodities and the like. So, even though cryptocurrencies have been around for more than a decade, they’re still in their infancy as far as markets go. One could say that the market is still trying to find its feet.

One of the fundamental reasons why cryptocurrencies are so volatile is that they are fundamentally backed by nothing of value outside the attention that they get. Unlike many fiat currencies which are either pegged to another currency’s value or whose value is unilaterally determined by a central authority, cryptocurrencies only derive value as a function of how many people are willing to use is to transact, i.e. trust in the asset because other people trust it. As a rule of thumb, the larger the number of people who accept the asset, the more valuable it becomes.

This is one of the hallmarks of speculative trading. In the crypto world or in any market that’s novel and untested, many people are in it to win it which means their strategies in trade has the objective of making as much profits as possible in the short term. Therefore, the market enters a subtly dangerous cycle of rapidly changing prices of assets. Basically, investors typically buy assets when prices are low and wait. As more investors are attracted to the commodity for its low prices, it sets off a cascade where more people buy in, causing the price to steadily rise. 

However, all good things must come to an end and it almost always gets to a breaking point whereupon the price gets high enough for investors to begin to sell. This reverses the earlier cascade and as more and more investors pull out, the prices can fall dramatically causing even more to sell off in fear of losing whatever investments they have left. The prices having fallen resets the game and primes investors to begin buying again.

Volatility has been one of the talking points of many critics of cryptocurrencies often comparing it to a Ponzi scheme. And in certain cases, persons of interest with large pulls and audiences can substantially affect the rate at which prices rise and fall. Other factors include government regulations. Volatility at its core reflects the often chaotic nature of trade and market interactions and human hopes and fears.

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Market Watch

What China’s crypto clampdown means for investors

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Over the weekend, China, the biggest crypto mining country once again, began to clamp down on cryptocurrency. Ten Chinese agencies including the central bank and banking, securities and foreign exchange regulators have vowed to work hand in hand to expose illegal cryptocurrency activity.

China has always placed stricter rules on cryptocurrencies but the new rule has made all crypto-related activities illegal. According to the People’s Bank of China (PBOC), it is illegal to cryptocurrency trading and anyone that does so will be severely punished; this includes those within China that are working for overseas platforms. To fully phase out the cryptocurrency mining sector, the National Development and Reform Council (NDRC) said that it would launch a nationwide crackdown on cryptocurrency.

Over the years, China does not recognize cryptocurrency as a legal tender. In 2013, the Chinese government referred to Bitcoin as a virtual commodity that individuals are allowed to freely participate in. This freedom, however, precludes banks and payment companies from providing services that are Bitcoin related.

In 2017, Initial Coin Offering (ICO) was banned. The ban was also extended to the conversion of legal tenders to cryptocurrencies by trading platforms which led most of the platforms to shut down operations in China. The crackdown led 88 trading platforms and 85 ICO platforms to withdraw from the market as of July 2018.

To China, the crackdown on cryptocurrency is necessary as the country is trying to launch its official digital currency and the need to fulfil its 2060 climate targets. The crackdown was necessary as cryptocurrency was seen as infringing on people’s properties and ‘disrupting the normal economic order.’

The statement by PBOC on Friday was unequivocal as the current crackdown is distinct from the previous ones. In his statement on Friday, PBOC called Bitcoin, Ether and Tether ‘legally irreparable’ and should not be used. The new regulations forbid financial institutions, marketing and IT providers from supporting crypto-related activities. The activities of both crypto holders and miners are now considered illegal. This is what Henri Arslanian, a PwC crypto leader termed as “No ambiguity. No room for discussion. No grey areas” in his tweet.  

What does this mean for crypto holders worldwide?

The major effect of China’s crackdown on cryptocurrency is the increase in price volatility. While volatility is a common phenomenon in the crypto world, a crackdown initiated by the world biggest cryptocurrency mining country will have a huge effect on market price.    

After the PBOC interview, Bitcoin fell by 4% within 24 hours and is currently trading at $43,320. Ethereum fell by 6% and it is currently trading at $3,036. With the Evergrande debt crisis and the huge blow bedevilling the crypto market, a clampdown by China would most likely keep the market price on the red until another good news crops up.

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