Recently, Bank of Canada, the North American country’s central bank released a report on Bitcoin [BTC] and other cryptocurrencies, titled ‘Crypto Money – Perspective of a couple of Canadian Central Bankers’. The report takes a deep dive into the cryptocurrency space, its evolution and its current role in terms of affecting the central bank’s role in the economy. The primary focus of the report was to highlight the payment and money properties of digital currencies as the bank claims them to be of “utmost importance.”
The report begins with five key observations about the cryptocurrency space. They are,
Classification of cryptocurrencies available in the market
Trading volume of cryptocurrency against the trading volume of U.S municipal bonds and U.S corporate bonds
Bitcoin’s market share over the course of time
Entry and exit of crypto-assets trading on exchanges
Bitcoin and other cryptocurrencies as a means of payment
The first observation speaks about the classification of digital currencies present in the space currently. Here, the report has divided the token found in the space into three types of currency. The first is cryptocurrencies, tokens that were created to play the role of currency and with which users can purchase goods and services. Here, Bitcoin [BTC], Litecoin [LTC], and Monero [XMR] are quoted as an example for this type of currency.
Second are Security Tokens, tokens that allow investors “to take some form of position in the firm”. According to the report, several Initial Coin Offering [ICOs] fall under this category. Third are Utility tokens that allow users “to consume goods and services specific to the platform,” like Ethereum’s token, Ether [ETH].
The report states,
“The difficulty for regulators is not only that there are shades of grey between different types of cryptoassets. They also may change types over the lifecycle of a project; many that start off primarily as a fundraising tool are intended to eventually be either a currency or a utility token.”
Furthermore, it also mentions CoinMarketCap’s distinction of cryptocurrencies in the market into four “broad buckets”. The first two buckets are Bitcoin and Ethereum, which are classified to be the most prominent assets in the space. The third bucket includes altcoins, cryptocurrencies that have their own blockchain and the fourth are those tokens that are based on other blockchains like the Ethereum blockchain.
The second observation is pertaining to the cryptocurrency market’s trading volume which saw massive growth over the past year and a half. Here, the report states,
“While cryptoassets may not yet be prominent enough to pose immediate financial stability concerns, they are prominent enough to warrant active monitoring assessment. In fact, the trading volume of cryptoassets is currently the same as U.S municipal bonds, which is also roughly the same as that of Canadian-Dollar spot foreign markets.”
It further reads,
“Moreover, during the peak trading in 2017, Bitcoin and tokens rivaled US corporate bonds trading volume. This raises the question of how the composition of the market has changed over time.”
The third observation the report speaks of is concerning Bitcoin’s market share in the cryptocurrency market, which has seen a steady decrease over the years. It states that the coin once had a “Lion’s share” of weekly trading volume when measuring in U.S dollars till 2015. However, this was soon cut to 50% in 2017, during the emergence of other tokens in the space.
“Bitcoin may still be the rockstar in this asset class, it appears to be aging fast”
The fourth observation is related to the entry and exit of cryptocurrency assets in the market. The report states that new cryptocurrencies started to enter the market in 2015 and picked up their pace in 2017. It further states that even though there were many crypto assets that were introduced to the market, there were several that failed.
Here, the reasons for the failure is stated to be either the failure of the exchange the token was listed on, providing no volume and liquidity for the coin, the failure of the asset itself, or the possibility that the token could have been a scam or the project would have met a dead-end.
“The introduction of cryptocurrencies such as Ethereum, Litecoin, Monero and EOS among many others show that at least some of the entry of new coins and tokens represent a kind of creative destruction with new coins and tokens improving on older coins and tokens.”
The last observation of the report was related to Bitcoin and other cryptocurrencies as a means of payment. Here, the report stated that the high volatility in the price of cryptocurrencies makes them a “very poor means of payment.”
“The high-price volatility of bitcoin imposes a large short-term risk to its users; and the relevance of this risk is accentuated by the fact that bitcoin is not the unit if account in most cases, for either goods and services or wages.”