2019 was a good year for investors.
Those who chose to buy bonds enjoyed moderate gains (up to +14%), while stocks (S&P: +29%, DOW: +22.3%, NASDAQ 100: +37.3%), gold (+18.6%), and crude oil (+34.2%) were performing extraordinarily, netting ludicrous profits for investors.
While traditional assets surged throughout 2019, last year’s top-performer came from elsewhere: the relatively new asset class of cryptocurrencies.
Bitcoin (BTC) – the largest digital asset by market capitalization – managed to tackle the aftermath of 2018’s bear market and entered into a bull run in early 2019, increasing its value from $3,739 to $7,293 between January 1 and December 31, 2019.
While Bitcoin’s price was on the rise, 2019 wasn’t the best year for altcoins (digital assets other than BTC).
ETH and XRP, the second and third largest cryptocurrencies, yielded negative gains (-0.7% and -45%, respectively) for their investors. From the top five (non-stablecoin) digital assets, only Bitcoin Cash (BCH) and Litecoin (LTC) managed to increase in value (+37% and +41%).
|Bitcoin Cash (BCH)||+37%|
|S&P 500 (SPX)||+29%|
|NASDAQ 100 (NDX)||+37.3%|
|Crude Oil (WTI CFDs, USOIL)||+34.2%|
|Dow Jones Industrial Average (DJIA)||+22.3%|
|Investment-grade corporate bonds||+14%|
|Tax-exempt municipal bonds||+7.4%|
As we can see from the above, Bitcoin’s 95% surge outperformed the gains of other assets in 2019. It’s safe to say that the cryptocurrency was the top-performer of the year.
But why did BTC recover from the 2018 bear market, and what are the reasons behind its remarkable performance in 2019?
An Uncorrelated Asset and a Store of Value
Due to being decentralized, Bitcoin is an uncorrelated asset. This means – unlike traditional assets (like stocks and bonds) that are highly influenced by the decisions of governments and central banks – the price movements of other assets hardly affect BTC’s value.
Bitcoin’s independence from sovereign authorities makes the cryptocurrency an attractive investment in the eyes of those who fear the consequences of major geopolitical events – such as the US-China trade war in 2019 that potentially led to increased BTC investment.
Furthermore, as Bitcoin’s supply is capped at 21 million coins, the digital asset isn’t subject to the high rate of inflation of most fiat currencies (e.g., USD, EUR, and GBP).
Due to being a scarce and uncorrelated asset, investors tend to see Bitcoin as a store of value (an asset that maintains its value without depreciating) like gold – and this is the reason why some deem BTC as the “digital gold.”
New Asset Class With Massive Growth Potential
One of the main criticisms of Bitcoin from “Wall Street veterans” is that the cryptocurrency falls into a relatively new asset class. Going along with the same logic, this means that investing your funds into BTC poses higher risks than purchasing a stock of a company that has been on the market for a long time.
While Bitcoin’s decade-long age could have some negative consequences for investors, it also comes with unique benefits that could have contributed to BTC’s +95% value increase in 2019.
The digital asset had become popular throughout late 2017 and early 2018 when its massive bull run was filling the headlines.
If we look at the profits those investors generated that purchased and sold the digital asset at the right times, it becomes clear that Bitcoin has a lot of growth potential, making it a much more attractive investment than low-yielding government bonds, for example.
The Effects of a Developing and Maturing Cryptocurrency Market
One of the biggest trends during late 2017’s and early 2018’s bull cryptocurrency market were Initial Coin Offerings (ICOs).
While ICOs allowed crypto startups to issue their own tokens to be sold to investors, a large share of organizations in the digital currency industry took advantage of the flaws of the fundraising method, launching token sales to generate quick profits for mediocre projects.
Even worse, the number of ICO-related frauds has increased exponentially, with scammers taking off with funds raised without delivering on their never-ending list of promises.
However, 2018’s bear market changed everything. Cryptocurrency prices have fallen drastically, with the number of fraudulent and immature projects also decreasing significantly. As a result, the digital asset market started to organically develop and mature, allowing institutional investors to enter the cryptocurrency space.
Multiple governments increased their regulatory scrutiny over the industry, and, in early 2019, Initial Exchange Offerings (IEOs) replaced ICOs in the form of a more secure and effective fundraising method for digital currency projects (IEOs are hosted on exchanges that screen projects before they allow them to raise funds while providing startups with different services).
Bitcoin’s price has likely experienced the effects of this evolving cryptocurrency market, which led to its massive surge in 2019.
What’s to come in 2020, we can’t know, but cryptocurrency is not going anywhere. If anything, over the coming year we will see more growth and adoption. If you’ve never owned any crypto and are interested to explore this, be sure to learn more about AAX’s OTC platform, the easiest way to buy and sell cryptocurrency.