Everywhere you go it seems that people are discussing cryptocurrencies. Most people are divided into one of two camps; it's either a bubble rivaling the Tulip bubble of the 1600's or poised for a massive run-up to the next all-time high (ATH). I do not think either of these views are accurate and the truth is somewhere in the middle. For this discussion, I am going to focus on Bitcoin, since its market cap accounts for 50% of the total crypocurrency market.
How Big Is It?
A colleague sent me this article yesterday that puts the size of the various markets into perspective. The whole cryptocurrency market is that dot on the in the top of the diagram.
Today, the market cap of all cryptocurrencies is roughly $300B, compared to the dotcom bubble, at its peaked, was at $3T before crashing in 2000. That means crypto today is only 10% the size of the dotcom bubble at its peak. I talk about this more in my previous post on the Age of Money Revolution.
When anyone talks about systemic risk, it is pretty clear that market is not big enough, at this time, to pose a significant risk, and the Federal Reserve has stated this conclusion as well, in May 2018, "Overall, however, the still relatively small scale of cryptocurrencies in relation to our broader financial system and relatively limited connections to our banking sector suggest that they do not currently pose a threat to financial stability."
Number of People Involved
Is everyone really getting involved in crypto? The short answer is NO. In fact, the number of people that actually own and do any type of transactions is quite small. In 2017, the number of bitcoin wallets increased 2X, from 13.7M to 27.7M. Assuming that each holder has at least 2 wallet addresses, one cold and one hot, then it can be concluded less than 14M people globally (about 0.32% of the global population) have bitcoin.
How Much In Avg Wallets?
As January 3, 2018, slightly over 50% of all wallets had less $3.00, 75% had less than $73.00 and 90% had less than $539, so even though everyone is talking about, very few actually own any and the value of coins, per wallet address, is overall very small. A point of note: the exchanges do hold the largest wallets, so the actual number of people and amount held per individual is probably slightly larger, but it is difficult to draw any conclusions. I would hope that anyone with significant holdings follows my previous advice and has moved most of it off of an exchange to a wallet they own.
HODL Waves
On of my favorite graphs, HODL Wave, was developed by Unchained Capital. The graph shows the time since the last UTXO (unspent transaction output or last time the coin was spent/created). In July 2018, you will notice that about 8% of all bitcoins in existence were traded, and during the frenzy of August 2017, it peaked at 24%. Further, roughly 18% of all coins did not move in 2017, even with the market hitting an ATH.
Cryptocurrencies are one of the only assets classes where this type of information is possible, due to the public blockchain.
Bringing It Together
Regardless of all the headlines and people talking about cryptocurrencies the actual number of people that own crypto is relatively small and the size of the market cap pales in comparison to even the next largest one, Gold.
This is why I conclude that we are not in mist of a bubble, nor significant price increase due market demand. If I were to lean either direction, I would speculate that we have significant opportunity in the next 24-48 mo's for the demand to increase, as more people get involved, and thus higher prices and a larger market cap.
Where do you see prices and market cap heading? Share your thoughts in the comments.