Crypto: where is it really used?

“Mirror, mirror on the wall, where can I find real-world applications of crypto?” This is a question that crypto enthusiasts ask themselves time and again. Despite years of development, critics point to the lack of tangible use cases among the public at large.

A self-critical analysis reveals that the crypto industry has perhaps got a little ahead of itself in many respects. Cryptocurrencies have not yet established themselves as a common means of payment, while blockchain-based social media platforms have not achieved the popularity of traditional networks and real estate transactions are also rarely processed via the blockchain.

Nevertheless, the efforts of developers have not been in vain, with some applications having now reached a considerable level of maturity. In this article, we would like to discuss a few of the first ones to do so.

A means of protection against inflation

Bitcoin has established itself as a digital asset and is increasingly finding its way into traditional investment portfolios. Whether as a supplement to the holdings of private individuals and households or as a strategic reserve for SMEs and large companies – Bitcoin is making a profitable contribution.

As the illustration below shows, the addition of Bitcoin improves the risk-return ratio of a traditional portfolio. Portfolios with crypto assets also generate higher returns than those without, while the level of risk hardly increases at all.

_{Source: ARCHIP & Bloomberg (real-world data)}

Companies that have held Bitcoin as a long-term reserve on their balance sheets over recent years have benefited from the appreciation in value of their Bitcoin holdings. This has led to an increase in the value of these companies, enhanced their capitalisation and improved their competitiveness, meaning that their chances of survival have been boosted.

_{Source: Lyn Alden Blog}

This “corporate playbook” for the continuous, strategic purchasing of Bitcoin was created by the listed US software company MicroStrategy and is now also being applied by firms such as the payment company Block, the stablecoin issuer Tether, the medical technology company Semler Scientific and the Japanese limited company Metaplanet.

The advantages offered by Bitcoin as a strategic reserve are now also being discussed in the highest political circles on the other side of the pond. US Senator Cynthia Lummis just recently presented the Bitcoin Reserve Bill, a draft law that provides for the purchase of one million bitcoin units. In Hong Kong, too, the first politicians are getting behind the introduction of a strategic Bitcoin reserve.

Real estate developers themselves could also one day follow the example of OneVest. The internationally active real estate and investment firm incorporated Bitcoin in its balance sheet as a means of safeguarding against a scenario in which real estate gives up part of its value preserving function to Bitcoin.

Going forwards, Bitcoin could even become an integral part of the credit markets. In the case of long-term loans, in particular, banks could, for example, require lenders to invest a portion of the borrowed money in Bitcoin in order to ensure additional long-term capital protection for the lender.

Further development of securitisation

Ethereum has been searching for its true identity for some time: world computer, ICO platform, dApp store or NFT hotspot. However, it is now becoming ever clearer that Ethereum could become the central infrastructure for tokenisation, meaning it has the potential to further develop the classic concept of securitisation.

In a similar fashion to how AWS or Linux now make up a large portion of enterprise data centres and software, many established TradFi providers could move significant parts of their core infrastructure to the Ethereum blockchain without the general public even noticing.

The example of BlackRock shows that this trend is already emerging. A few months back, the world's biggest asset manager launched a tokenised money market fund (BUILD) on the Ethereum blockchain. Since its introduction in March, more than USD 500 million has already been invested in this product.

The main motivating factor behind tokenisation is efficiency. Tokenised money market fund units can be used as collateral in clearing and margin trading, significantly reducing operational friction losses in the event of margin calls. This increases both capital efficiency and liquidity and improves the investor experience.

Tokenisation is also an interesting proposition for private market investments, which are increasingly being used as a means of portfolio diversification. While these investments are difficult to integrate into traditional funds or ETFs, they can be tokenised.

Ethereum is establishing itself as the preferred blockchain for tokenisation projects. Most tokenised assets are currently found on the Ethereum platform, as revealed by the illustration below.

_{Source: RWA Word}

Global meme casino

This year, so-called memecoins have been among the best-performing crypto assets. These cryptos are either deliberately created as a joke, are inspired by popular Internet phenomena or parody real events. They chiefly serve as objects of speculation.

In the crypto world, there are conflicting views as to whether memes are a serious form of adoption. While many consider them useless, others see them as digital lottery tickets that offer a new way to gamble online. Their value may lie in the entertainment they provide, the sense of community they create and the prospect of financial gain.

The popularity of memecoins in recent months has led to a flood of new tokens. A popular platform for launching such coins is Pump.fun, on which in excess of 1.6 million memecoins have been launched since March.

_{Source: Dune Analytics}

The large number of memecoins is giving rise to intense competition for the attention and capital of investors and traders. As a result, the prospect of achieving success with memecoin trades is decreasing continuously. Rug pulls represent an additional risk. These crypto scams see liquidity abruptly withdrawn from the pools via which these memecoins are traded.

This memecoin hype is chiefly being made possible by the Solana blockchain. Solana is currently the preferred platform for crypto speculators. The total economic value, comprising transaction fees and MEV, rose by 52% in the second quarter relative to the prior quarter to stand at USD 151 million. What is more, the decentralised exchanges (DEXs) on Solana have outperformed those on Ethereum in terms of 30-day trading volume.

At present, it seems unlikely that the Solana DEXs will lose their leading position in memecoin trading to competitors on other blockchains. The Solana blockchain will also continue to be one of the frontrunners in terms of both transaction throughput and speed. And the Firedancer update, which is planned for the first quarter of 2025, is set to make the blockchain even faster and more efficient. Memecoin trading is also an area with high on-chain activity, meaning that centralised exchanges with their off-chain trading can hardly compete with the DEX volumes.

The success of Solana thus currently appears to be heavily dependent on the continuing memecoin hype. But just how sustainable is this boom? The following observations are striking:

• on 30 July, 295.8 million transactions were recorded on the Solana blockchain, with 1.4 million daily active users. This gives a ratio of 208.7 transactions per user, a remarkably high figure. In comparison, Ethereum had 1.2 million transactions on the same day with 364,400 active users, which equates to a ratio of 3.15 transactions per user.
• Solana DEXs such as Raydium and Orca have unusually high trading volumes in their liquidity pools for various memecoins relative to the available liquidity.

The high volume of transactions relative to the number of daily users as well as the unusually high trading volume compared to the available liquidity on Solana DEXs indicate that a considerable portion of memecoin trading on Solana may be driven by so-called “wash trading”. This term refers to sham transactions that see insiders buy and sell at the same time in order to give the impression of greater trading activity and a higher market volume. The demonstrably high level of bot activity on Solana, i.e. the use of automated programs for trading transactions, reinforces this assumption.

In light of these circumstances, it is possible that a large share of the trading volume on Solana is not organic. Should this be the case, trading activity could collapse as soon as it becomes unprofitable. This may occur, for example, if a critical mass of memecoin speculators suffer constant losses and thus cease their trading activity. This would also negatively impact demand for Solana and its coin SOL.

It is difficult to predict just how far away we are from this point. However, it is undisputed that most memecoins do not have a long lifespan. A recently conducted analysis of so-called celebrity tokens – token projects on Solana that have been launched by celebrities such as Hulk Hogan, 50 Cent, Caitlyn Jenner, Iggy Azalea and Jason Derulo – reveals that these tokens have lost an average of 94% of their value relative to their all-time high since their introduction (see illustration below).

_{Source: X}

Important legal information

_{This publication is intended for information and marketing purposes only, and does not constitute investment advice or a specific individual investment recommendation. It is not a sales prospectus and does not constitute a request, an offer, or a recommendation to buy or sell investment instruments or investment services, or to engage in any other transaction. Maerki Baumann & Co. AG does not provide legal or tax advice. Investors are therefore advised to obtain independent legal or tax advice concerning the suitability of such investments, since their tax treatment depends on the personal circumstances of the investor in question and is subject to change at any time. ­Maerki Baumann & Co. AG holds a Swiss banking licence issued by the Financial Market Supervisory Authority (FINMA). This publication is expressly not intended for persons domiciled in Germany or so-called U.S. persons.}
 

Editorial deadline: 7 August 2024

Maerki Baumann & Co. AG
Dreikönigstrasse 6, CH-8002 Zurich
T +41 44 286 25 25, info@maerki-baumann.ch
www.maerki-baumann.ch