Pareto's Principle and The Future of Digital Assets

I believe this will be the ultimate fate of Bitcoin, to be the ‘high-powered money’ that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers. Bitcoin transactions by private individuals will be as rare as... well, as Bitcoin based purchases are today.
— Hal Finney, early Bitcoin developer and user, in a blog post dated 12/30/2010
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A few months ago I was in New York City for the weekend. While walking between 5th and 6th Avenue on W 47th Street, I passed by a money exchange shop and a jeweler that both had signs on their storefronts proclaiming that they accept Bitcoin.

That experience reminded me of my initial encounter with cryptocurrency. I first heard about Bitcoin in 2013. Five years later, the global crypto market is now valued at nearly half a trillion dollars. In looking ahead, I find myself reflecting on what the future holds for digital assets.

Recently, Goldman Sachs announced that they will be launching a cryptocurrency trading desk. And NASDAQ similarly said that they are mulling over the idea of becoming a crypto exchange. Investors and traders should be mindful of these developments.

It's often asked how do we go about valuing an entirely new market like this? To be honest, I don't have the answer to that question; quite frankly, I'm not sure anyone truly does. Yet what is clear is that institutional interest is growing. And once this interest is piqued, investment follows.

With the rise of alternative digital assets, commonly referred to as "altcoins", Bitcoin's dominance of the total crypto market now stands at about 36%; prior to 2017, it comfortably dominated about 80% of the market share. Ethereum is the second highest valued cryptocurrency in the world; together, Bitcoin and Ethereum now account for over 50% of the entire market capitalization of global digital assets. More than a thousand others lag behind.

Thus, I wonder whether the crypto market will eventually reflect Pareto's Principle: in other words, will 80% of investment dollars concentrate in the top 20% of the world's digital assets?

Considering the growing interest in this speculative market, the aforesaid question necessitates reflection. One must also consider it against the potential growth of the market as a whole. Dan Morehead, the CEO of Pantera Capital Management, recently predicted that global cryptocurrencies may be valued at $40 trillion in the next ten years. In contrast, the world's gold supply is currently valued at about $8 trillion.

Assuming Morehead's prediction pans out, and that Pareto's Principle manifests over the long run, then the top 20% of cryptocurrencies would collectively be worth over $30 trillion in the next decade. To put this in perspective, that's sixty times more than the present market cap of all digital assets combined. With trillions left to spare, the remaining 80% of the crypto market would have plenty to divvy up.

One might consider all of this as wishful thinking, and it may very well be, but Morehead isn't the only prominent crypto bull in the world today. Jack Dorsey, the CEO of Twitter and Square, predicts that Bitcoin will be the world's predominant currency in the next ten years. This corresponds to the earlier forecast made by Hal Finney, as cited at the top of this post.

Time will ultimately tell what awaits for this burgeoning sector. Yet one thing is for certain: we should all keep an eye on it.