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Crypto vs traditional finance in 2023
Today’s investors are faced with many options beyond stocks and bonds, with the crypto/traditional finance narrative becoming increasingly common.
Public and private players are constantly looking for opportunities to deploy capital in investment vehicles that generate substantial returns while presenting minimal risk. However, the nature of risk appetite has evolved over the past decade with the emergence of a new asset class accessible all over the world.
Before committing resources to an industry, whether it is decentralized finance (challenge) or traditional markets, investors need to understand what separates the two. This article explores crypto versus traditional finance: the differences, the similarities, and whether now is the right time to get started.
Cryptocurrency or traditional finance
In the debate between cryptocurrency and traditional finance, the main differences lie in their operating models and accessibility. Traditional finance (tradfi) relies on centralized entities such as banks, governed by regulations often set by a few managers, and is limited by geographical and operational constraints. Although reliable due to its long history, this system often excludes people living in remote areas from access to financial services.
On the other hand, decentralized finance (defi) operates without traditional banking infrastructure, providing transparency and community involvement through verifiable codes and smart contracts. Crypto vs finance highlights the flexibility of the challenge, enabling 24/7 trading worldwide without geographical barriers, unlike the limited trading hours of traditional markets like WE Sotck exchange.
What is traditional finance? This is a system where innovation can be slow due to strict regulatory compliance, while cryptocurrencies encourage the rapid development of new financial products. Additionally, traditional finance often has higher transaction costs and slower cross-border settlements than the fast and cost-effective transactions of cryptocurrencies.
Investment analysis also differs between these sectors. Traditional financial investors focus on metrics like price-to-book ratios, while crypto investors consider project whitepapers, tokenomics, and community engagement. This comparison between crypto and finance highlights the evolving financial services landscape and the growing appeal of cryptocurrencies.
Crypto vs traditional finance in 2023
Markets have seen significant price movements throughout 2023. Inflation in the United States and other countries around the world has apparently prompted liquidity injections into many business and financial sectors to hedge against against economic downturns.
According to official data, the S&P500 recorded an increase of 24.87% year-to-date (YTD).
S&P 500 growth since the start of the year | Source: spglobal.com
Gold, one of the most popular assets in the trade, reached its all-time high price (ATH) in 2023. Prices of the yellow metal peaked in December, trading as high as $2,150 per ounce. This represents growth of 13.3% in 12 months.
Gold price in 2023. Source: goldprice.org
Bitcoin (BTC), the leading blockchain and crypto token, has grown 158% year-to-date, eclipsing both the S&P 500 and gold. The cryptocurrency, often referred to as digital gold, was trading at just $43,000 at the end of the year, approximately 36% below its ATH reached in November 2021.
Bitcoin Price in 2023 | Source: CoinMarketCap
Another major cryptocurrency, Ethereum (ETH), has seen gains of 100% year-to-date, also outpacing gold and the S&P 500 in profitability. Currently, the coin is trading at $2,404, remaining the leading blockchain for building crypto infrastructure and launching tokens and dapps.
Ethereum Price in 2023 | Source: CoinMarketCap
However, crypto typically experiences massive volatility and price fluctuation compared to TradFi.
Why people prefer crypto
The crypto industry is still in its infancy, although institutional interest is growing, as indicated by the spot exchange-traded fund (ETFs), and mass adoption is also increasing, with several jurisdictions developing clear rules to oversee digital assets.
Billions of dollars have been invested in cryptocurrencies as investors seek new markets offering significant returns. While crypto has inherent risks ranging from security issues to bad actors, it also offers transparency since anyone can view blockchain transactions with tools like Etherscan.
This transparency allows for anonymity because on-chain transactions appear under an alphanumeric wallet address rather than a bank account associated with private information such as your name and address.
On-chain transfers are immutable, meaning they cannot be altered or tampered with, adding an extra layer of trust from users. Many Defi protocols are also open source; everyone can see the underlying code, increasing transparency within the crypto community.
Thus, users can manage their risks while achieving high returns on their initial investments. Additionally, crypto is controlled by the collective and encourages peer-to-peer financial interaction in a neutral environment where demand and supply exist.
It is important to note that cryptocurrencies and the challenge are open to everyone, regardless of geographic area. You do not need government approval or banking permission to participate in crypto. Crypto trading is, however, prohibited in some countries like China.
Is now a good time to invest in crypto?
Crypto, like any financial sector, has its bear and bull cycles where the market is either going up or down. Digital asset markets historically operate in one to two year intervals, with a 12 to 34 month gap between cycles.
Considering that the last confirmed bull run ended in 2021, followed by a crash in 2022 marked by several crypto bankruptciesand a resurgence in 2023 fueled by institutional interest, this could be a good time to evaluate investments in crypto assets.
The titans of Wall Street love BlackRock have applied for exchange-traded products to invest in Bitcoin and Ethereum at spot prices. They are the two largest blockchains and cryptocurrencies in the world, with a combined market capitalization of over $1 trillion.
Traditional banks like JPMorgan Chase, the largest US bank, has decided to commercialize blockchains and promote the tokenization of real-world assets (RWA) like real estate. RWAs on blockchains are already a billion-dollar industry, according to Coingecko.
Furthermore, the Bitcoin halving is expected to take place by April 2024. This will effectively cut the supply of Bitcoin in half and create a situation that could trigger an increase in demand. Supporters are divided on whether this development is already priced into the bargain. Yet data shows that Bitcoin never returned to its pre-halving price.
A mix of cyclical patterns, institutional focus on spot crypto ETFs, BTC halving, and general bullish sentiment means this could be a good time to invest in crypto. However, when investing in speculative markets and risky assets like digital currencies, caution is required.
Bitcoin Halving Cycles | Source: bitbo.io
Conclusion
Disclosure: This article does not represent investment advice. The content and materials presented on this page are intended for educational purposes only.
Cryptocurrencies and traditional finance both experienced watershed moments in 2023. Assets like gold hit an ATH, and the world’s largest asset managers took an interest in BTC and ETH, an indicator that billions of dollars of retail money could soon be flowing into cryptos.
Overall, major cryptocurrencies outperformed traditional markets and ultimately came out on top in the traditional crypto-finance showdown in 2023. However, it is important to keep in mind that both markets can be volatile and so investors should make sure to do so. their due diligence before making any investment decisions in 2024 or later.