We see the high returns in cryptocurrency and many claim they are unsustainable. This is a viewpoint that appears easy to counter.
To start, when we are dealing with returns, we have to look at the size of what we are discussing. Obviously, a small company can grow at a 100% rate for years on end. When we compare that with, say, an Appl, we know that is not possible. A company that is worth $2 trillion is not going to double each year in value.
The reason for this is simple. We would have to see an outrageous growth rate for Apple for it do see its market cap double. Hence, the astronomical returns on that asset is impossible.
We cannot say the same thing about a small, start up company. Something like that could easily see its customer (user) base increase by many orders of magnitude. It is not uncommon for newer companies to exhibit a 200%-300% annual growth rate in their customers for a number of years. Of course, at some point that rate becomes unsustainable.
This can be the foundation for our analysis.
Cryptocurrency's High Growth Rate
Crypto.com recently revealed its study of the cryptocurrency industry based upon number of users. Through November 2021, it is believed we are approaching 300 million users of cryptocurrency. This would be up from the 100 million to start the year.
Here we see the inherent ability to provide outsized returns. When anything is growing that fast, there is a lot of money to be made. However, this is not the only barometer we can go by.
In addition to more users, we can see growth occurring through the idea of them using more. For example, with a company like Apple, its user growth rate might have slowed by they continually seek to get those people to either buy different products or add additional services. Both can help to boost their revenues.
It is the same thing with cryptocurrency. As we expand the opportunities within the realm, we see people utilizing different applications. Hence a single individual might use 5 or 7 applications.
This is what kicks of what is known as Reed's Law. It is an exponential growth formula that values technology networks.
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This sums up cryptocurrency. We can already see how subgroups (communities) are forming around this technology. As networks expand, both in users and development, the result will be exponential growth in valuation.
Here is where the gap with the existing system can start to close..
Legacy System Big And Slow
Many discuss the size of the legacy system. There is little doubt that what was established over the decades is enormous. It is also very powerful. That does not mean, however, it is insurmountable.
History is littered with examples where newer technologies entered the picture and took down some institutions that were thought to be impenetrable. This is going to be another example.
When we compare cryptocurrency and all its tentacles to the traditional system, we see something like this image. If we were to put both on a scale, obviously it would be heavily tilted.
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It is not hard to guess which side cryptocurrency is on. Nevertheless, the returns mentioned above to rapidly advancing growth rates as well as development means things can even out quickly.
Consider for a second all the money (value) that is floating around in the traditional system. It is into the quadrillions of dollars when we factor derivatives and other off-balance sheet assets. This makes cryptocurrency look like a fly on a horses hind end in comparison.
When we look at the present market cap according to Coingecko, we see a measly, in comparison, $2.3 trillion. A "drop in the bucket" comes to mind.
Alas, not all is doom and gloom. Here is where the growth rate, and rate of return, kicks in. While the legacy system can only increase a few percent a year, the crypto-economy can far surpass that. The gap will not close in a year or two but, like start up companies, outsized returns can be seen for 5 years or more.
Consider for a second what things would look like if we had a doubling of the user base every year for the next 3 years. That would give us 2.4 billion users by the end of 2024. How would that change the value of the cryptocurrency world?
If we apply Reed's Law to the equation, we can see that the value would be a lot higher than just the multiplier of users. Since people will be involved in many different ways, we can see how the overall value skyrockets. This could put the market cap of cryptocurrency over $50 trillion.
This might seem unbelievable when we consider where we are now. It is, however, the basis of exponential growth. We only need to think about all the different projects that are going to roll out over the next few years. The tokenization process grows at an astounding rate.
Cryptocurrency is quick and agile while the behemoth that is the legacy system is very slow to adapt.
Eat The Elephant One Bite At A Time
This is an old motivational trick. When faced with a daunting task, break it down into smaller components. Then we can start to tackle the challenge.
For example, do not focus upon losing 30 pounds. Instead, a digestible serving might be to walk 2 miles today. That is something that is manageable.
We see the same thing here. Each dollar (EURO, YEN) that is moved into cryptocurrency helps to balance out the scale. It is a monumental task which is why long-term focus is required. Nevertheless, the history of the Internet is littered with companies that were obliterated as this technology entered those industries.
As always, the Internet has come to money.
The suggestion to keep growing one's bags obviously come from a personal level. If an individual does this, he or she will likely be better off financially. There is also a collective viewpoint we need to consider. As more of us do this, the entire "market cap" of our holdings grows. This expands the resources available within the entire industry to help further development and accelerate the growth of things even more.
It ultimately becomes a positive feedback loop which snowballs. This is how anything in the way tends to get wrecked in the process. Astronomical growth tends to take on a life of its own.
The reality is that the growth rate of cryptocurrency is going to have to far exceed the few percent in the present global economy. Hence, we are going to see returns that help to close the gap with the legacy system. Many will feel they are unsustainable, which they will be at some point. However, we need to keep in mind that we have hundreds of trillions of dollars to go before we are even close to catching up.
Here is where we see the opportunity for massive wealth generation.
We will check back in a few years to see where we are.
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