Fred Wilson, an early investor in Twitter, Kickstarter and other successful Web 2.0 companies, recently blogged that there's "plenty of disappointment" in the cryptocurrency space right now — but he's optimistic that many of these disappointments will be overcome in the next few years. And, he’s still actively investing in the market.
While regulators are hostile to crypto, many crypto projects are massively delayed and few consumers earn and spend in crypto, Stablecoins like Facebook's Libra are a bright spot, crypto assets have become popular within mobile applications and Bitcoin has found definitive product-market fit as a censor proof digital store of wealth.
Let's take a look at how the cryptocurrency space is maturing and why investors remain bullish on its future.
Technology Growth Phases
Most technologies follow a similar growth cycle when it comes to market adoption and maturity — and the cryptocurrency market is no different.
The first phase of the technology life cycle is the research and development phase. Many cryptocurrencies are still experimenting with different models, such as proof-of-work versus proof-of-stake, while developers are only starting to explore what's possible building on a blockchain. These cryptocurrencies aren't quite ready for the mass market.
The second phase is the ascent stage where early adopters use the technology. While speculators may feel like they've already missed the boat, many cryptocurrencies are only starting to achieve product-market fit with real end users. Stablecoins payments and Dapps are starting to catch on with early adopters across key target markets.
The third phase is the maturity phase when the technology achieves product-market fit and widespread adoption. In many ways, Bitcoin has started to enter this phase as an alternative asset class with the launch of a futures market and the upcoming launch of exchange-traded funds (ETFs). But, many other cryptocurrencies are far from the mature phase.
The fourth and final phase is the decline when the technology becomes commoditized or replaced by alternatives.
How the Crypto Market is Maturing
The maturity of the cryptocurrency market varies depending on the specific use cases and target market — different use cases are maturing at different speeds.
As an investment, there are signs that the Bitcoin market is maturing with the launch of a futures market and upcoming exchange-traded funds (ETFs). These tools give investors easy access to an alternative asset class with low correlations with conventional stocks, bonds and commodities — a valuable tool for institutional and individual investors alike.
Stablecoins also provide consumers with a stable programmable digital currency. Without the volatility associated with Bitcoin and other alt coins, Stablecoins — like Facebook's Libra — could finally provide consumers with the stability that they require to actually receive crypto income and make crypto payments during their everyday lives.
As an institutional tool, cryptocurrencies are starting to exit the research and development phase. For example, JPMorgan's JPM Coin is designed to create an Interbank Information Network to eliminate pain points in the way information circulates within foreign correspondence banking transactions between banks (e.g. interbank markets).
As a consumer tool, cryptocurrency remains in the very early stages. The volatility associated with many cryptocurrencies makes them unusable as a cash or credit card alternative, while very few merchants accept cryptocurrency payments. It could be years before the consumer market is tapped and cryptocurrencies are used as a payment method.
Investors Betting on a Crypto Revolution
Cryptocurrency has evolved from a hobby project developed by Satoshi Nakamoto in 2008 to a highly-speculative investment to a genuinely useful tool for a variety of end markets. While there is still a lot of work to be done before they enter the mainstream, it has become clear that cryptocurrencies solve a very real need across a large number of target markets.
Some of the key hurdles to widespread adoption include:
- Regulatory Reforms - The United States, European Union and many other regulatory bodies are very critical of cryptocurrencies and could limit their use.
- Taxation Reforms - The IRS treats cryptocurrencies as investment property, which puts onerous requirements on taxpayers to report any transactions.
- Reliability - Many cryptocurrency projects are in their early stages and the sector has long been full of controversy — even stemming back to its original founder.
- Awareness - Many consumers are still unfamiliar with cryptocurrencies, including how to buy, sell and transact with them in a real environment.
According to Pitchbook, venture capital investments in crypto and blockchain startups exceeded $850 million during the first quarter of 2019 following $2.4 billion in 2018 investments. These numbers include major bets from the London Stock Exchange Group, Microsoft Corp. and other multinational corporations looking to leverage the technology.
Many financial firms see big opportunities in the "tokenization" of conventional assets, such as stocks or commodities, while tech firms believe that the blockchain could add a native economic layer to the web. Crypto intermediaries have also seen their valuations rise, including Coinbase with its $8 billion valuation.
How ZenLedger Helps
ZenLedger helps investors navigate the complexities of tax reporting with the IRS.
The platform enables anyone to import cryptocurrency transactions from all major exchanges and private wallets, automatically calculate gains and income and auto-fill tax forms like Form 8949 and Form 1040 Schedule D. If you use TurboTax, the ZenLedger integration automatically integrates transaction data with your tax forms with minimal effort.
Some reasons to consider using ZenLedger:
- You can save a lot of time by automating the calculation of capital gains and losses.
- You know that you're paying exactly the right amount of tax — no more or less than you have to pay.
- You can dramatically reduce your tax preparation fees by eliminating work for your accountant.
- You can automatically identify tax loss harvesting opportunities to lower your tax bill.
- You have a defensible audit trail in place in case you're audited by the IRS.
The Bottom Line
Cryptocurrencies have experienced many setbacks over the past couple of years, from onerous regulations to extreme volatility. Despite these hurdles, many investors believe that the market could see significant growth over the coming quarters as the technology matures across several end markets — and they're putting their money where their mouth is.
The IRS recently issued its first cryptocurrency guidance since 2014 on October 9, including Revenue Ruling 2019-24 and frequently asked questions. The documents discuss everything from how to treat hard forks to calculating capital gains and losses. We discuss many of the key takeaways in a recent blog post covering the topic.
If you're an investor in the space, consider ZenLedger to help make tax preparation less stressful by automating the calculation of capital gains and losses.