Viewpoint: Cryptocurrency may become a second-tier asset class based on the legal currency system


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We are still in the early stages of the evolution of cryptocurrency into the second layer of the economy, and now it can be said that Bitcoin has become the mainstream alternative store of value.

Original title: ” An article discusses the future of cryptocurrency, will it become a second-tier asset class based on the legal currency system?
Written by: QCP Capital
Compiler: Glendon Mao

In this article, we delve into the trends, innovations and developments in the encryption field, which will shape the future growth of the field.

Are we in a cryptocurrency super cycle?

A side-by-side comparison of cryptocurrency and NASDAQ market capitalization (at different times) shows that we are in a super cycle.

figure 1

Both markets have followed similar stages of development usually seen in super cycles.

Phase 1: Recognition and initial adoption (slow upward trend)

The disruptive potential of a new technology began to stimulate the imagination of the market, and in the ensuing boom, the valuation rapidly expanded. For cryptocurrencies, this was the bull market in 2017, and for the Nasdaq, it was the Internet bull market in 2000.

Phase 2: Bubble burst (rapid sell-off)

As asset prices fell to pre-hype levels, the bull market came to an abrupt end. For Nasdaq, it was the burst of the Internet bubble, and for cryptocurrency, it was the 2018 crash.

Phase 3: Consolidation (lateral trading)

A long bear market or period of consolidation followed, leading many to ignore asset classes or market segments, even though the market continued to evolve.

Stage 4: Mania (Rapid price increase)

The substantive use of technology quickly exposed the valuation gap. The market chased this gap, leading to a frenzy that prices rose more than 5 times the previous high.

The main difference between the super cycle phases of the two markets is the length of time: Nasdaq has more than 40 years, while cryptocurrencies have been less than 6 years.

The acceleration phase may be the result of exponential growth in the money supply and unprecedented trading tools and leverage brought by digital assets. If so, we should be prepared, in the future, the market boom/bust cycle of cryptocurrency will become shorter and faster.

The next super cycle-Decentralized Finance (DeFi) and NFT

The DeFi and NFT markets seem to have just begun their own initial recognition/adoption phase, and many people still don’t know anything about the opportunities in the ecosystem. As BTC matures as an investment asset (even with Tradfi ETF now), DeFi and NFT are just getting started.


Decentralized finance (Defi) currently has a total value lock (TVL) of USD 200 billion, spanning more than 500 independent platforms. Approximately half of TVL flows into lending and decentralized transaction agreements, with a total value of US$100 billion in TVL (Figure 2).

Decentralized exchanges are unique to cryptocurrencies. They are non-custodial peer-to-peer exchanges that use automated market makers instead of order books.

Viewpoint: Cryptocurrency may become a second-tier asset class based on the legal currency system figure 2

Decentralized exchanges (DEX) and lending protocols are currently the main attractions of Defi, but more innovative and practical protocols have made a significant contribution to the development of the ecosystem. These new innovative agreements include insurance, payment plans, derivatives trading and other services, and many teams launch new agreements every day.

More and more innovative projects directly lead to more TVL being attracted to the entire Defi ecosystem. We expect Defi to become the main growth pillar of the cryptocurrency field in the future. In this regard, Goldman Sachs also agreed.


Between Defi and NFT, NFT is relatively unfamiliar of the two because it combines art and technology. NFT is a unique single issued token that can prove that a piece of digital media is unique and cannot be copied. Imagine that any digital file or media has a unique serial number (chain code) to ensure its authenticity as part of a collection or unique work.

For example, the Mona Lisa or any other priceless works of art. The Mona Lisa can be copied by any capable artist, but it will never be the original. This is the same as a digital artwork, it can be easily copied, but as an NFT, it can be easily proved to be non-original by checking the blockchain. This makes it more advantageous than artwork, because in artwork, people who are interested may have to work hard to identify a work from an expert, which takes a lot of time. In cryptocurrency, you can simply check the blockchain in a few seconds.

However, unlike a simple canvas or marble block, NFT can be programmed through functions. It can be used as a key or access/authorization code for various functions. For example, Bored Apes Yacht Club NFT is also a membership card for Bored Apes exclusive events.

Other examples of the usefulness of NFTs are the “keys” issued to early liquidity providers of the young Defi platform Gfarmv2. These keys are no longer issued, but for existing holders, they can now raise interest rates when placing bets on the platform. This allows the secondary market to develop around the ecosystem, in which not only tokens can be traded, but also NFT keys from income farmers (mortgage) to other income farmers can be traded.

There is no doubt that with the continuous development of the NFT ecosystem, more and more innovative use cases will be developed, just like the innovations that have emerged with the development of the Defi field.

Is there a bubble in NFT, and will prices collapse?

The crazy price changes of NFT have always been the reason for the excitement and hype of many people. The following section is our view on NFT valuation.

The first logical question to ask is whether NFT creates scarcity.

Nansen’s market-leading NFT tracker shows that there are currently 1,288 independent ETH series on Opensea, 700 of which were created in the past month and 200 in the past week alone. This does not even include NFTs on other chains such as Solana.

In each series, the number of NFTs in circulation can range from the usual several thousand to as high as 2 million (Cryptokitties) or even 7 million (Gods Unchained Cards). The amount of supply depends entirely on the decision of the original designer of the project, and the scarcity of manufacturing is a well-known feature in many NFT projects.

In the past 3 months, the number of NFTs has grown exponentially, which really shows that there is no limit to the speed at which you can create unlimited “investable assets” in cryptocurrencies and start real-time transactions.

In the past, any collectibles, such as baseball trading cards, would have a complete production/distribution cycle to navigate before entering the very opaque secondary market. Now, for any NFT, there will be a primary auction within a few seconds, followed by a secondary transaction-all of these, including every transaction and real-time order, are completely transparent on the blockchain.

Although most of the collection is worthless, the total market value of all Opensea ETH NFTs totals 5.8 million ETH ($19.8 billion). Among them, only the first 30 collectibles accounted for 4.6 million ETH, valued at $15.7 billion.

The reason why these CryptoArt NFTs can be increased indefinitely is because it is very simple-by randomizing the combination of several basic attributes, any number of appearance features can be generated with basic algorithms.

Cryptopunks is a pioneer of NFT similar to BTC, and it may be worth paying an average price of 123 ETH ($420,000) for them now. In fact, its value has so far been maintained better than any other collection. The BoredApe series is also worth noting. At the Sotheby’s auction, 107 works were sold at a price of US$24.4 million, which was recognized by the larger art world. Of course, there is also the successful blockchain game Axie Infinity. (Chart 3: The top Opensea ETH collection by market value on October 5th—

Many analysts try to use statistical data to determine the final value of the creation, such as release date or artist, but none of these show any relevance and reinforces the perception that all this may be just random. It is undeniable that popularity and community are the driving factors for the increase in the price of collections, and it all boils down to the attraction of culture and status. Many collectors who were once anonymous made public appearances to showcase their online collections.

Viewpoint: Cryptocurrency may become a second-tier asset class based on the legal currency system image 3

The community plays an important role in the increase in the price of collections. The Boring Ape NFT collection has caused a prisoner’s dilemma among its holders, because many Boring Ape NFTs hold bids in collusion to raise the reserve price, and they believe that other collectors will not actually sell it. This is done to increase the reserve price displayed on Opensea, which is very beneficial to them.

Strong community connections and cooperation foster a passion within the community of project holders. These holders began to express themselves through their NFT avatars on websites such as twitter, which aroused the interest of those who are still outside the micro-NFT community.

With the increase in enthusiasm, many people find that they want to buy the item to become part of something greater. Coupled with the strong refusal of existing users to sell, the bottom line of prices may rise. A good example is the Solana monkey business on the Solana chain and its MonkeDao.

After all, this is a meme-flex-game era, and for many people, the virtual world is often more real than the real world itself. The value of NFT and almost all art lies in how much someone is willing to pay for it. According to this logic, there is no logical upper limit for any art.

However, the current NFT art trends and Play-to-earn (P2E) trends are very similar to the tulip mania. Like all such bubbles, this story will eventually evolve into an exponential distribution, and only the top projects or series will survive. Just like the ICO crash in 2018, 99% of ICOs have disappeared.

However, not all prospects are bleak. The bursting of the bubble in the NFT field will clear out junk projects and make everyday consumers wise, similar to the ICO epidemic in 2018 that enhanced the ecosystem.

The fanatical stage of CryptoArt and P2E will coincide with the paradigm shift, and people’s daily lives will be more intertwined with the meta universe. This will greatly benefit these two markets.

For the entire NFT, when it finds itself embedded in everyone’s daily life, from asset ownership certification to digital service certification in various real-world uses, its frenetic phase will come.

At the end of August, a new experiment around Doge meme NFT gave people a glimpse of the huge long-term potential and wide-ranging impact that the current NFT trend provides to the world, not just the dizzying valuation.

PleasrDAO purchased the original Doge NFT meme image for 1696 ETH (5.5 million US dollars), and immediately divided it into nearly 17 billion NFT shares, supporting the same number of ERC-20 tokens, called DOG-every Everyone who owns DOG tokens will own a small share of the original NFT. To a certain extent, this is an “asset-backed” security.

The market value of DOG, or by implication, the market value of the original meme NFT alone, was valued at more than $225 million within a few days of its release. Despite the incredible valuation, this successful experiment has many use cases in the world of asset securitization. At no time in history has it been possible to imagine such a thing-instant securitization and distribution.

Ultimately, the nuances in this area do not provide a simple answer to the question of whether prices will collapse. Our personal bet is NFT in P2E, and we are actively seeding upcoming games and guilds.

Crypto valuation

The issue of NFT valuation can be widely applied to general cryptocurrency assets. How to determine the fair value of coins and tokens?

In traditional markets related to the real economy, we can use various indicators related to the real economy itself to measure the degree of artificial inflation of asset prices.

For example, in terms of stocks, comparing the valuation of the Standard & Poor’s 500 index relative to US GDP and M2, we can see how the overvalued quantitative easing (QE) 2, 3 and the latest Covid-driven QE 4 (so far) Make the value of stocks relative to the real economy (Figure 4).

On this basis, it can be said that each round of QE after QE 1 has produced an incredible diminishing effect, but this is another matter entirely.

Viewpoint: Cryptocurrency may become a second-tier asset class based on the legal currency system Figure 4

In contrast, there is no real anchoring of cryptocurrency assets beyond usage penetration and capital flows. This is both the gospel of the bull market (there is no upper limit on the upside) and the disaster of the bear market (the lower limit of asset prices quickly becomes non-existent).

The pricing and valuation of cryptocurrencies have very little connection with the real economy. There is no reference point for fair value. Any number can be justified in some way. Are we all flying blindly?

How should we trade?

In the absence of a valuation anchor, as long as it can remain flexible, cryptocurrency may currently provide the most lpha opportunities in any asset class.

But in order to manage such a market for a long time, we tend to adopt some common frameworks.

Ultimately, we expect that as broader utility in the cryptocurrency field is developed, there will be greater differences in asset prices within cryptocurrencies.

Until today, BTC has always been the leader of the overall macro trend in the encryption field. Even now, many tokens are still highly correlated with BTC price movements, making it the de facto market leader. Where BTC points, there are many others following.

However, starting this year, we began to see a sharp decline in correlation as a whole, as the market began to shift to thematic trading, which is what many long-term cryptocurrency locals like us have been hoping for (Figure 5).

Even if BTC fell or traded sideways, many tokens began to perform well, indicating that the market is beginning to mature and decouple from blindly following the BTC trend.

Viewpoint: Cryptocurrency may become a second-tier asset class based on the legal currency system Figure 5

Our long-term framework:

1. Global M2 (money supply) must increase before we can see broad macro asset price appreciation (bull market cycle). Since 2017, the only two periods in which BTC has been in a consolidation state are periods of global M2 stagnation (Figure 6-Red box and M2 stagnation in Covid (red line)).

Although the daily headlines are very noisy, in the end it is only the expansion/contraction of M2 that is driving the megatrend.

Viewpoint: Cryptocurrency may become a second-tier asset class based on the legal currency system Image 6

2. Comparing BTC with the S&P 500 index since 2017, it can be seen that they are beating the same drum with different rhythms (Figure 7).

Viewpoint: Cryptocurrency may become a second-tier asset class based on the legal currency system Figure 7

BTC with higher β value and sensitivity has peaked 9 months earlier than the S&P in the previous two times (yellow line BTC top and red line S&P 500 top), but both are always injected into global liquidity At the same time the background bottomed out (green line).

This different macro asset performance reflects the β value of M2 expansion/contraction, among which high β value assets are more sensitive to global liquidity conditions.

The speed, magnitude and advance/lag time of global liquidity injection/withdrawal all depend on this. The reasons leading to different beta coefficients (β coefficients) are different-related to asset liquidity, risk status and the super cycle stage of the asset.

3. Ultimately, demand and supply drive asset prices, just like everything else in the economy.

Although the ever-expanding M2 can provide continuous demand, it needs to be combined with a fixed (maximum) supply in order to generate positive real returns in the long term, or, better than fiat currency, a deflationary supply. This gives us the holy grail of investment-scarcity.

a. Bitcoin’s halving mechanism is widely understood as reducing the inflation of its supply until it finally becomes fixed. Taking into account the lost tokens and dormant wallets, the fixed supply can therefore be regarded as an effective mild deflation, because many tokens are not available and can be regarded as lost in the general market.

b. With the implementation of EIP-1559 in August and the entry of ETH 2.0 sometime next year, the main logo change of ETH means that due to its newly implemented destruction mechanism, ETH will soon have a complete deflationary supply.

Assuming an average Gas price of 50 Gwei and the expected implementation date of ETH 2.0 at the end of the first quarter, the supply of ETH will reach a peak of approximately 119.4 million ETH on the ETH 2.0 release date, after which the total supply will begin to shrink (Figure 8) .

This is in sharp contrast to the previous unlimited supply in the old proof-of-work structure, which is the same as fiat currency in terms of supply dynamics. Of course, the ETH 2.0 implementation date will be an event that may completely change this timetable.

Viewpoint: Cryptocurrency may become a second-tier asset class based on the legal currency system Figure 8

c. In addition, despite recent high-profile publicity, Doge in its current form is unlikely to serve as a good long-term store of value (SOV) with unlimited supply.

Joining Vitalik as an advisor does bring hope, and perhaps changing the economics of Doge tokens is on the agenda. Or maybe Doge’s intention is to create a pseudo-fiat digital currency that can continue to expand the supply, but it is not used as an SOV, but is developed as a widely accepted medium of exchange.

On the contrary, due to Bitcoin’s design, it is unlikely to become a widespread medium of exchange in its current form, although many South American socialists may wish to do so. However, if Doge’s transaction speed can be accelerated to the speed of new tokens (such as SOL or ALGO), then with sufficient support from a sufficiently strong group, Doge may achieve this goal in the future.

In general, we are structurally more BTC, ETH and most of the first tiers such as ALGO and SOL. Our short-term trading focuses on the inefficiencies of these currency options and forward curves. As crypto trading becomes more and more institutionalized, derivatives are areas where we see scalable alpha, which is very similar to the stock, bond, and foreign exchange markets decades ago.

Cryptocurrency is the second layer solution to the first layer problem of fiat currency

In the decentralized cryptocurrency ecosystem, the definition of layer 1 refers to the basic blockchain layer, such as Bitcoin, Ethereum, Polkadot, Solana, Algorand, etc. The second layer refers to the network and protocol built on the underlying layer 1 blockchain, which greatly improves the scalability and efficiency of the entire layer.

The concept of layers can be simply decomposed into: the first layer is the service foundation, and the second layer is a free service built on the first layer of the bottom layer. In other industries, it can be said that the Internet is the first layer (protocol layer), and the second layer is Google. It is a service built on the Internet to help users browse the Internet more easily.

In the macroeconomic world we live in, there are similarities with the layer 1/layer 2 structure of cryptocurrency. The current fiat currency-based monetary system in our economy represents the basic level 1. The future cryptocurrency will become the first level 2 asset class built and expanded on top of the fiat currency level.

This means that the foundation on which cryptocurrency relies is the traditional currency system, and cryptocurrency as the second layer will help make it easier for everyday people to master. This is because cryptocurrency eliminates many middlemen in traditional finance. One of the reasons why El Salvador has designated Bitcoin as legal tender is that it helps eliminate middlemen, such as Western Union, and thereby eliminate additional costs for Salvadorans.

We regard the current currency exchange rate system based on fiat currencies as the first layer, because every commodity, service, and asset in the global economy is just a derivative of it. The amount of first-level expansion (M2) affects all prices—especially all asset prices.

Cryptocurrency will function as the second layer for the following reasons:

  • It has the ability to create value on a large scale by itself through the verified token inflation multiplier.

  • The use of cryptocurrency will eventually expand to all sectors of the real economy, and everyone can enter the cryptocurrency ecosystem. Covid has become a catalyst, undoubtedly consolidating this irreversible transformation.

The first layer is the basic layer based on fiat currency, and then, most of the innovations subsequently developed to the second layer-decentralized/encrypted ecosystem.

Cryptocurrency has many value propositions, not only as a mainstream alternative store of value (SOV), or as a recognized medium of exchange; there are also applications related to the large-scale democratization of finance or art, culture, sports, and daily functions .

Fortunately, we are still in the early stages of the evolution of cryptocurrency into the second layer of the economy, and now it can be said that BTC becomes the mainstream SOV.

If our vision of the development of cryptocurrency as the second layer of the economy comes true, then there is no doubt that the market value of the entire cryptocurrency will further increase exponentially.

In the future, how much of the total global M2 will actually flow through the second layer? We are still arguing about this issue. But for assets with a fixed or reduced supply in the second tier, the price appreciation of the assets will be inevitable.

We are often asked whether we think it is too late to invest or enter cryptocurrency, whether the price has risen too much, and whether the ship has set sail? As the crypto ecosystem continues to evolve into an application and interaction layer based on the fiat currency system, our view is that this is just the beginning.

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