The cryptocurrency surge: unraveling the viral spread of digital assets

In the dynamic realm of crypto, one question looms large for every market participant: what could be the future value of various cryptocurrencies? Forecasting it is no simple task, and while the Total Addressable Market Model can be a great basis for forming an opinion based on actual usage as money, there simply can't be a perfect methodology. In this article, we step away from data and figures to focus on a very simple, yet powerful concept: how the diffusion of cryptocurrency ideas and the broader adoption of crypto influences their values.

How Do Cryptocurrencies Spread, And How Far Have They Gone

Beyond traditional metrics, the value of cryptocurrencies is driven by demand, which in turn is fueled by the knowledge and appreciation of these digital assets. This highlights the intrinsic connection between the widespread understanding of crypto utility and the overall market demand, shedding light on a crucial aspect often overlooked in conventional forecasting models.

A theory rooted in simple analogies

Drawing inspiration from biology and anthropology, let’s envision cryptocurrencies as a viral phenomenon, adapting and evolving as they spread. While three key factors drive this spread, external forces have been extensively covered in other blog posts, so this article focuses on: 

• Virality and Infectiousness: How contagious is the idea of cryptocurrencies? 

• Susceptibility or Resistance: Are certain populations more open to this financial evolution? 

Virality and Infectiousness

Just like a virus, the spread of cryptocurrencies relies on hosts and vectors. Individuals become susceptible to cryptocurrencies if they have a need or an appreciation for their potential utility. Positive experiences with cryptocurrency usage then turn these individuals into hosts, perpetuating the spread. However, it's the network effect that truly magnifies this phenomenon. As more hosts join and positive experiences accumulate, the network effect kicks in, creating a powerful cycle of growth. Each new participant not only adopts cryptocurrencies but enhances their appeal for others. 

Think of the early adopters as the 'patient zero' who initiated the spread of cryptocurrencies, with the source being Bitcoin’s pseudonymous creator Satoshi Nakamoto. The first susceptible population, the enthusiasts, caught it through various channels. From this starting point, it expanded exponentially, reaching its current state of adoption.

Bitcoin adoption is still in its infancy

Linking back to our analogy of cryptocurrencies as a virus, the adoption of cryptocurrencies can be visualised as an S-curve, representing the gradual uptake followed by rapid adoption and eventual levelling off as the technology becomes ubiquitous. 

The S-curve is a widely used model to describe the adoption of new technologies. It depicts an initial slow uptake followed by rapid adoption and then a levelling off as the technology becomes ubiquitous. Cryptocurrency adoption can be mapped onto this curve. While assessments vary, it is estimated that 46 million people, or 13.7% of the United States’ total population, currently own cryptocurrency as of 2023. This would suggest that cryptocurrencies are still in the early stages of adoption. With a worldwide adoption rate of just 4.2%, according to Triple A, cryptocurrencies are still far from reaching mainstream adoption. However, the growth rate in cryptocurrency adoption has been impressive in recent years, and there is growing evidence that cryptocurrencies are gaining traction in both developed and developing markets. The recently approved Spot Bitcoin ETFs add further fuel to this dynamic, as financial institutions open a new, mainstream channel for investing in these digital assets.

Susceptibility or Resistance

The spread of digital assets is effectively the sum of all subsegments affected, each at their own speed.

Visualising the spread becomes a roadmap for investors, offering insights into the diverse paths of adoption. The speed at which crypto permeates different subsegments and the variety of users it attracts can provide a nuanced understanding of its trajectory.

Some of the most promising subsegments include:

DeFi - Decentralised Finance is the delivery of financial services such as borrowing, lending and investing without the need for an intermediary like a bank. Total value locked (TVL), a metric that measures the amount of assets held in DeFi applications, is $75.8 billion (as of Tuesday 20th February) according to DefiLlama, with the vast majority on the Ethereum protocol ($45.6 billion as of Tuesday 20th February). TVL has plenty of scope to grow, given 1.4 billion of the global population remains unbanked.

Tokenization - Tokenization is the process of issuing a digital representation of an asset on a blockchain. At the end of 2023, investment bank UBS, Asian bank DBS and digital asset solutions provider SBI leveraged tokens (representing the payment currency) to launch the world’s first live repurchase transaction, a form of short-term borrowing commonly referred to as a repo. For context, the Brookings Institute estimates that between $2 and $4 trillion worth of repos trade daily.

Identity - The immutable and decentralised nature of blockchain technology means it’s ideally designed to combat identity theft. In September 2023, Serpro, Brazil’s national data processing service, announced that it had developed a private blockchain to store and issue identity documents. Serpro launched the solution in the states of Rio de Janeiro, Goiás, and Paraná with plans to expand it to the country’s entire population of 214 million.

Gaming - Blockchain technology has transformed the gaming industry by facilitating secure and transparent transactions and adding new dimensions to gameplay, for example incorporating non-fungible tokens (NFTs) and allowing players to earn revenue. According to research by Fortune Business Insights, the size of the global blockchain gaming market is predicted to grow by 21% annually to nearly $615 billion by 2030. In the last 30 days alone, over 364k users have played Axie Infinity, the most popular game.

As an investor, recognizing the distinct adoption levels and pace within these segments provides a comprehensive view of the crypto landscape. The sum of these individual trajectories shapes the global S-curve, emphasising the interconnected nature of crypto adoption across diverse industries and needs. Navigating this intricate map allows investors to anticipate shifts in demand, identify growth opportunities, and mitigate risks tailored to each specific use case.

Forming your opinion on crypto’s rising adoption 

Consider the following pivotal factors when assessing the landscape of Bitcoin adoption and its potential impact on your investment strategy:

• Recognizing the Broad Market Appeal: Acknowledge the diverse user base as paramount. Beyond specific demographics, understanding the broad market appeal of crypto is essential.

• Tailored Measurement Strategies: Precisely gauge adoption within each subgroup to obtain a more accurate picture of crypto’s impact.

• Understanding Multifaceted Use Cases: Recognize crypto’s multifaceted role in different aspects of the economy and society.

• Being Mindful of Regional and Industry-specific Trends: Consider local and industry-specific adoption trends to stay ahead of evolving market dynamics.

• Appreciating Network Effects: Understand the exponential increase in crypto’s value within specific user groups, recognizing the power of network effects.

   

Conclusion

By understanding the interplay between demand, knowledge, and appreciation, investors can decipher the nuanced dynamics of crypto adoption and gain valuable insights. Stepping back, it's clear that the cryptocurrency’s journey reflects a fascinating interplay of technological innovation, market forces, and user behaviour, offering investors a unique lens through which to analyse and navigate the ever-evolving landscape of digital assets.