Crypto assets: developments and perspectives
In recent years, crypto-assets have increased in popularity, despite being volatile, speculative and not a currency.
29 May 2019
Crypto-assets are a relatively recent phenomenon. Since they arrived on the scene approximately ten years ago, crypto-assets have increased in popularity, which has resulted in a growing number of trading platforms and an expanding variety of new crypto-assets.
By May 2019 there were more than 2,000 varieties of crypto-assets (although the vast majority of them are not used) with a total market capitalisation of approximately €230 billion. As can be seen from the chart below, crypto-assets are highly volatile and their combined value is small relative to the value of euro banknotes in circulation or other asset classes.
The market value of crypto-assets is equivalent, for instance, to Finnish GDP and corresponds to approximately 19% of the total value of euro banknotes and coins in circulation. The latter have steadily increased since their introduction in 2002, reaching a value of more than €1.2 trillion for banknotes and about €29 billion for coins at the end of April 2019.
The value of crypto-assets is also small compared to the big five digital technology firms (Facebook, Apple, Amazon, Netflix and Google – the FAANG index) at only 8% of their market capitalisation. Bitcoin represents approximately 55% of the total market capitalisation of crypto-assets (May 2019).
As a comparison, total issuance of electronic money in the euro area (excluding the Eurosystem) reached more than €9 billion in May 2018. In 2017 commercial banks accounted for approximately 70% of this electronic money issuance.
Chart 1: Market capitalisation and index of crypto-assets compared to euro banknotes and the FAANG index.
Notes: Market capitalisation of crypto-assets (EUR billions, end-of-month, left-hand scale); value of euro banknotes in circulation (EUR billions, left-hand scale); CRIX (CRypto IndeX) (end-of-month, closing data index, rescaled by a multiplication factor of 20 million, left-hand scale). The “FAANG index” refers to the largest worldwide technology companies and is composed by Facebook, Apple, Amazon, Netflix and Google and their market capitalisation is converted into euro.
Sources: ECB Statistics, Bloomberg, thecrix.de, Coinmarketcap.com.
Crypto-assets are not currencies. They differ from money (including electronic money) and do not have legal status or a distinct legal framework, and they are unsupervised. They are highly speculative, and as such expose holders to the risk of large losses. One reason is that they do not represent an underlying claim against the issuer. The absence of any specific institution, such as a central bank, protecting the value of crypto-assets makes them unsuitable for use as a form of money. Moreover, the pronounced volatility of crypto-assets and their limited acceptance by merchants discourages their use as a store of value or means of payment and makes it difficult to use them as a unit of account.
Holders of crypto-assets may also be exposed to digital fraud and the theft or loss of private digital keys – used for accessing crypto-assets – all of which increases the risk of financial losses. It may also be difficult to identify counterparties in transactions, which poses a threat to financial transparency. On the other hand, the technology underlying crypto-assets, distributed ledger technology (DLT), seems to offer some advantages to users. It may reduce transaction costs and settlement times and it is borderless.
In this Insight, crypto-assets are characterised as a new type of digital asset recorded in digital form which does not represent an underlying claim against or liability of its issuer.
The emergence of crypto-assets, of which Bitcoin is one of many, has been enabled by technological developments that go under the name of distributed ledger technology (DLT), in particular blockchain technology. DLT is a tool for recording ownership of a certain asset in which the database of transactions is spread across a network of many computers, rather than stored in a central location. Usually, all the members of the network can read the information, and depending on their permissions, add to it.
While information on digital wallets is not provided in this Insight, the term is often used in relation to crypto-assets. The wallets are often the location where users can store keys to access their holdings of crypto-assets. Wallets exist “online” and “offline” and differ according to their level of security.
The market capitalisation of each crypto-asset is calculated by multiplying its price by its circulating supply.
The ECB and euro area national central banks have the sole legal right to issue euro banknotes and coins. In this Insight, euro banknotes and coins in circulation refers to “net circulation”, i.e. the value of euro banknotes and coins in issue without distinction as to who is holding the currency, and includes amounts held by credit institutions.
Money can be issued in forms other than cash. Electronic money (e-money), for instance, is defined as monetary value stored electronically on a technical device such as a pre-paid card or a smartphone. It can be stored within a chip card or on a server, where the user can transfer money digitally. E-money is mainly issued by banks, but can also be issued by other entities.
The CRIX (CRypto IndeX) is a near real-time benchmark index compiled by a team at Humboldt University of Berlin.
To find out more about money and crypto-assets, see:
ECB Crypto-Assets Task Force (2019), Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures, No 223, Occasional Paper Series
ECB (2018), Virtual or virtueless? The evolution of money in the digital age, lecture by Yves Mersch, Member of the Executive Board of the ECB
ECB (2017), Digital Base Money: an assessment from the ECB’s perspective, speech by Yves Mersch, Member of the Executive Board of the ECB
ECB (2015), Virtual currency schemes – a further analysis
ECB, Virtual currency schemes, 2012, including case studies on Bitcoin and Second Life
ECB, Banknotes and coins circulation
ECB, Banknotes and coins production
ECB, Financial stability implications of crypto-assets, Financial Stability Review, May 2018, Box 4
ECB, How could new technology transform financial markets?
European Parliament (July 2018), Cryptocurrencies and blockchain – Legal context and implications for financial crime, money laundering and tax evasion
European Parliament (July 2018), Virtual currencies and central banks monetary policy: challenges ahead, Monetary Dialogue
Bank of England, Digital currencies
Danmarks Nationalbank (December 2017), Central bank digital currency in Denmark?, Analysis, No 28
BIS (2018), Central bank digital currencies
The CRypto IndeX (CRIX) is available at theCRIX.
The market capitalisation of crypto-assets is available at CoinMarketCap.
The market capitalisation of the five largest technology companies is taken from Bloomberg.
Exchange rate series in SDW: EXR.D.USD.EUR.SP00.A
GDP series in SDW: MNA.A.N.*.W2.S1.S1.B.B1GQ._Z._Z._Z.EUR.V.N