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Crypto 101

How Have Digital Assets Developed?

The digital asset class has continued to develop in response to recurring problems.

Satoshi Nakamoto and the Rise of Digital Assets

Trust in the traditional financial system plunged in the wake of the 2008 financial crisis. In response to this crisis of faith, a programmer (or programmers) using the pseudonym “Satoshi Nakamoto” announced the development of bitcoin. “The root problem with conventional currency is all the trust that’s required to make it work,” Nakamoto wrote. “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible... With e-currency based on cryptographic proof, without the need to trust a third-party middleman, money can be secure and transactions effortless.”[1]

Bitcoin made its forthright debut as peer-to-peer electronic cash and the first digital currency to use blockchain technology. While the asset predominantly remains a medium of exchange, the press and crypto proponents began to promote bitcoin as “digital gold” due to its limited supply and rising value.[2] With a hard cap of 21 million bitcoin and demand dynamics historically ascribed to gold, bitcoin has evolved to be both a medium of exchange and a store of value. 

Satoshi’s bitcoin remains the most well-known digital asset. The resulting sector is now host to over one thousand digital assets––fifty of these have market caps above $1 billion. [3] Additionally, traditional financial sectors and governments contribute to the mainstreaming of digital assets, developing intermediated CBDCs that will exist in tandem with disintermediated digital assets like bitcoin. As more of today’s investors incorporate digital assets into their portfolios, the accelerated adoption, utility, and growth of these assets offer increasingly sound diversification potential.

How Have Digital Assets Developed?

Prior to the advent of decentralized assets, traditional finance (TradFi) generally settled transactions with assets like commodities (possessing intrinsic value), representative money (such as checks), and ‘legal tender’ fiat currencies.

Transacting within TradFi is increasingly mired by inefficiencies inherent to bureaucracy and the complexities of government regulation, which differ from country to country. The Central Bank remains dependent upon intermediaries––credit unions, payment processors (like Visa and Mastercard), etc.––to facilitate transactions while the State is at the heart of transaction mediation. Data breaches and ransomware hacks remain pain points for this sector. And average consumers with low checking balances are often subject to exorbitant fees for basic financial services while being excluded from VIP banking benefits.

Decentralized finance (DeFi) aims to improve upon the limitations of TradFi. Perhaps the greatest benefit of transacting within DeFi is that the ecosystem operates 24 hours a day, 7 days a week, and 365 days a year. Blockchain transactions are also celebrated for greater transparency and nearly instantaneous settlement. Crypto assets make it possible for anyone with internet access to transact globally, instantly, and independently of centralized finance. 

Just as bitcoin emerged from the financial crisis, this unique asset class has continued to develop in response to recurring problems encountered in traditional financial sectors. Decentralized applications––built upon programmable blockchain technology and powered by crypto assets––are continually emerging and evolving to resolve long-standing inefficiencies associated with traditional finance and complex bureaucracies. 

Continued mainstream market adoption of digital assets brings increased stability to the crypto ecosystem. And ‘smart contract’ programmability expands their utility, drawing increasing numbers of investors, competitive traditional financial institutions, and forward-thinking artists towards digital asset engagement. Digital ‘store of value’ assets like bitcoin, NFTs, and programmable assets like stablecoins are now seated alongside established traditional assets like equities, fixed income, and commodities in modern portfolios. The extraordinary growth of this ever-evolving asset class offers promising diversification potential for future-proofed portfolios.