It has been a rough few weeks for the cryptocurrency market, as prices drop towards where they were in Fall 2017 before the memorable Winter that the crypto world will never forget. Currently, on-lookers, investors, HODL-ers, and everyone in between are concerned about the future of cryptocurrencies. But fear not!
Cryptocurrencies aregoing absolutely nowhere and, in fact, we have good reason to assume that the cryptocurrency market is going to be an incredible long-term investment.
Here are the 6 reasons why the future is bright for crypto, even if the market has dropped as of late:
1. Non-correlated returns
One major leg-up that cryptocurrency has over more traditional assets is that it has starkly non-correlated returns when related to those asset classes. As you can see by the correlation matrix below, Bitcoin and Ether have relatively low (closer to 0%) correlation rates compared the other asset classes listed. This is a very valuable feature for any investors or traders that tend to deal with traditional asset classes.
2. Perfect for Portfolios
Due to the low correlation of cryptocurrencies and other asset classes, crypto is ideal for portfolio allocation, whether that be with asset managers, retail investors, or traders. This low correlation allows for bearish markets in traditional asset classes to not have too significant an impact on the overall portfolio, as cryptocurrencies can pull more weight during these periods. Some of the most common and successful portfolios could benefit greatly from incorporating cryptocurrency.
As seen in the graphs below, the 60–40 portfolio (60% equities + 40% bonds) and the All-Weather Fund championed by Ray Dalio (30% equities + 40% long-term bonds + 15% short-term bonds + 7.5% commodities + 7.5% gold) gain enormous value by using cryptocurrency, even if they only incorporate small amounts.
In the table below, you can see that by involving cryptocurrency in the 60–40 and All-Weather portfolios, returns increase directly as more cryptocurrency is added to the funds. Additionally, Sharpe Ratios increase in a similar fashion.
Returns and Sharpe Ratio between Jan 2016 and Aug 2018
3. High Volatility
While those who are inexperienced or slow to act may see high volatility as a negative, those with investment and trading experience know that high volatility leaves the door open for incredible returns if that volatility is capitalized on. It allows the traders with the data and knowhow to be able to trade in a stagnant or even declining market and make considerable returns from it.
As you can see from the volatility matrix below, Bitcoin and Ether are by far the most volatile assets.
4. Incredible Innovation Potential
Because high volatility opens the door for potentially massive profits, it also opens the door for a large amount of innovation to take place as an attempt to take advantage of this. Any cryptocurrency trading tool or platform that can offer users outsized returns if they trade with cryptocurrencies, especially if that tool is using artificial intelligence and machine learning, will likely be a massive success.
One such project many have been keeping a close eye on is RoninAi, which is a SaaS tool launching soon. They appear committed to jumping on the volatility in the crypto market and enabling their users to turn a large profit by analyzing over 100 factors that contribute to cryptocurrency prices.
5. Offers Independence from National Currencies
In the turbulent world of international sanctions that we live in, a large portion of citizens in countries whose fiat currencies have been depreciating are in desperate need of a usable currency that is not tied to their government’s ability to act on the world stage and avoid sanctions.
Recently, Turkey’s lira fell 20% overnight as the United States imposed an additional set of sanctions. During this time, Turkish cryptocurrency exchange usage saw a massive spike, as Turkish citizens recognized that putting their lira into cryptocurrency would help them avoid the impending drop of the lira.
The combination of anonymity, ease of conversion to crypto, and the ability to move funds overseas makes cryptocurrencies a very attractive alternative and safety valve for citizens of any country, but especially those found in the graph below.
According to this data, about 30% of the entire global population lives in a country that experienced a significant currency depreciation in the last 5 years. Due to central banks’ inability to stabilize the currencies of their countries during these times, we will undoubtedly see cryptocurrency be relied upon more and more in the future when the economies of particular countries suffer.
6. Other investment opportunities continue to lose appeal
Currently, especially for retail investors, the global economy isn’t offering a lot of appealing investment opportunities. As Peter Borovykh mentions in his book, “Blockchain Applications in Finance”, inflation-adjusted global rates are very unattractive to investors.
The majority of developed countries have neutral or negative inflation-adjusted returns on bonds, while developing countries have higher government bond returns. These developing countries do not have the sufficiently developed capital markets required to offer extensive investment opportunities to foreign retail investors. This leaves many investors with one question on their mind:
“How do I generate wealth?”
Cryptocurrency is certainly one of the main answers to this question, due in large part to its ease of access and for many of the reasons mentioned above. Moving forward, the crypto market may have taken a bit of a hit as of late, but believing that it will continue down this road goes against all of the concrete reasons laid out above, and is a fear that I would certainly steer clear from.