The Old and the New: The Convergence of Traditional Finance and Crypto Finance
Cryptocurrencies are at a turning point: Whereas in the past, people asked why they should invest in Bitcoin, today they ask why not?
More than two dozen public companies now hold cryptocurrencies on their balance sheets, reports Barron’s magazine. Nine percent of financial advisors invest in digital assets on behalf of their clients, found a Bitwise Asset Management survey in 2021. Payment companies like PayPal now allow users to pay with cryptocurrencies just like with a credit card.
Clearly, change is underway.
The convergence of two worlds
It’s not just the likes of Tesla, Square, and Micro-Strategy, run by people with a personal tech-affinity, that are buying cryptocurrencies. Insurance giant MassMutual announced in December that it had purchased Bitcoin worth $100 million as part of a “broader strategy.” Likewise, traditional banks are increasingly getting into the asset class. The latest example is Bank of New York Mellon, America’s oldest bank, which announced in February that it would soon offer custody services for cryptocurrencies.
In April, the Crypto Council for Innovation (CCI) launched, with prominent members such as Fidelity, Square, and Coinbase Global. CCI is a global alliance of crypto industry leaders “with a mission to demonstrate the transformational promise of crypto and communicate its benefits to policymakers, regulators, and people around the globe.”
That members of the “old” financial world have joined the CCI sends a message: We will experience the convergence of the cryptocurrency system and the traditional financial system over the coming years. The IPO of crypto exchange Coinbase is also part of that: From the very beginning, Coinbase set out to become a connector between “old” and “new” finance. The fact that a leading crypto exchange now lists on the NASDAQ is a harbinger for the convergence of two worlds.
A virtuous cycle: corporate adoption and cryptocurrency prices
That financial industry giants are today feeling more comfortable with crypto has undoubtedly to do with the asset class’s robustness. While cryptocurrencies had their fair share of ups and downs in the past, the asset class has always bounced back stronger than pre-crisis. The marketwide COVID-crash in March 2020 was the latest example: In the months thereafter, Bitcoin has outperformed almost every other asset.
The latest boost came from corporate adoption. Corporate adoption and cryptocurrency prices form a virtuous cycle: As crypto prices had quickly recovered last year, corporate adoption has sped up. As more corporations are getting into Bitcoin, prices increase even more, which convinces more corporations to invest.
The next wave of corporate adoption will likely come from owner-operators – firms such as Facebook that could use cryptocurrencies on their platforms. That could spur another price appreciation cycle, persuading more investors to join. This virtuous cycle could continue for a long time, but there will also be bumps along the road. That’s why investors who want to get into crypto need a proven and tested risk management strategy.
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