How big can cryptocurrency become?
This is a question that many seem to underestimate. Few appear to realize how big things really are out there. We seem amazed when the talk of billions turns to trillions. For this reason, many within cryptocurrency look at the market capitalization of gold and compare things to that. We believe that $8T-$10T might be on tap.
Sadly, this underestimates things greatly.
Some get a bit of insight when we discuss the tokenization of real estate as being the future. That is a $300 trillion industry ripe for disruption. Cryptocurrency is going to eventually take over that.
However, this still underestimates what is potentially out there.
Then there is the $750T-$1.5Q derivative market. Certainly this could be taken over by crypto also. Yet again, still underestimating the potential.
What about if we focus simply on currency. This is something that is at the core of cryptocurrency, especially with the emergence of stablecoins. The following will show the potential of something such as the Hive Backed Dollar (HBD).
FOREX
When it comes to markets, nothing compares to FOREX (Foreign Exchange). This is light years ahead of bonds ($100T) or US equites ($50T). It even tops both real estate and derivatives.
The FX market is unregulated. It is open 24/7, 5 days a week. This is an arena dominated by the large banks along with some major insurance companies and hedge funds.
In short, it is one of the potentialities of cryptocurrency.
So how big is this giant? Keep in mind, the entire market capitalization of cryptocurrency right now, according to coingecko, is just over $1 trillion. It peaked in November 2021 at around $3 trillion.
Here are a couple vital stats:
Forex markets had a daily turnover of $6.6 trillion dollars in 2019, up from $5.1 trillion in 2016.
The total value of the forex industry increased from $1.934 quadrillion dollars in 2016 to $2.409 in 2019.
The daily trading volume is more than double the all-time-high in crypto market cap and more than 6 times what it is now. In other words, the entire cryptocurrency market needs a 6x just to equate to the daily volume of FOREX.
Then we have the 2019 value. We can presume it is higher today since global trade only keeps increasing. Nevertheless, we can use the number of $2.409 quadrillion.
Basically, we are looking at $2.5 quadrillion in value. That is a 2,500x from where cryptocurrency stands right now.
Add up derivatives, real estate, bonds, and stocks and they still fall short, by a wide margin, of the size and value of the FOREX market.
Decentralized and Unregulated
The FOREX market is both decentralized and unregulated. Banks interact with each other, effectively making it an interbank market. There are dealers who dominate in terms of the majority of the volume. Smaller banks go to these institutions to get the currencies they need. There are other participants such as insurance companies and hedge funds but they make up a minor part of the volume.
It is effectively a peer-to-peer system. That does not mean the distribution is throughout. With a few dominant players, the major investment banks tend to have an outsized influence.
Here again, we see the pathway forward of cryptocurrency. While there is a lot of talk about regulation, we see how much of what takes place in the financial world is the exact opposite. Between FOREX and the Eurodollar system, we are talking trillions in daily activity operating outside the scope of central banks and governments.
We have the models to follow so it really makes it easy to construct a system that replicates what is in place. The key difference is the removal of the banks as intermediaries.
FOREX is no different.
DeFi's Opportunity
Much was made about Decentralized Finance (DeFi) and the potential it wields. This is certainly true yet is also underestimated in its potential.
DeFi is targeting this market. It is the simplest form of infrastructure construction since it is really basic.
To illustrate this, it is important to note what the participants in FOREX are really doing. What is the service they provide?
Essentially, they are ensuring the right currency gets to where it is needed. This is why the dealers handle transactions that are in the hundreds of millions of dollars. They facilitate the moving of USD to EURO, for example, so that merchants in the EU get their payments in the latter. For this to be accomplished, the European banks that individuals are dealing with need EUROs on hand. This is where FOREX comes into the picture.
DeFi changes this up since individuals are not required to utilize a bank. Instead, if they need a particular currency, this entails nothing more than heading to a liquidity pool and swapping what is needed. Want to go from BTC to USDC, there pools for that. Of course, at the moment many use the centralized exchanges yet that will change with time.
Now that we spelled out the landscape, imagine for a second liquidity pools (and DEX) handling $6.6 trillion worth of transactions daily. This is obviously the level required to sustain global trade. Picture the opportunity for cryptocurrency, via DeFi, to take that over.
Eventually, it is likely this all will be driven by wallets. For example, it might be a situation where a merchant sets the wallet to a default currency, such as USDC, and all payments that come in are automatically converted to that.
All of this shows the tremendous upside for cryptocurrency, especially stablecoins. If these end up taking over transactions, imagine what that does to demand.
In our next article we will cover how stablecoins fit in and what the potential for HBD truly is.
For now, we should embrace the fact that the potential for cryptocurrency is much bigger than we imagined, even based upon today's numbers. This will only grow as more use cases are developed along with economic expansion globally.
Even a 1,000x on the market cap would only get us part of the way to the present FOREX numbers.
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