The invention of Bitcoin (BTC -1.68%) in 2008 was just the first step in what has been a long roller-coaster ride for cryptocurrencies. Since then, the market has expanded from that single asset to thousands of tokens. Although not all of them are needed -- a harsh truth that the market is currently dealing with -- the underlying technology that crypto runs on is proving that it has the potential to shake up a host of industries.
One of the original goals behind Bitcoin's invention was to allow users to circumvent banks and traditional financial institutions. With blockchain-based cryptocurrencies, users can send money to each other without the need for the transaction to be processed by an institutional intermediary.
For these reasons, banks and other traditional finance entities are starting to migrate their operations to blockchain-based solutions that make them more efficient and transparent. At least, that's what the chief executive officer of the world's largest money management company thinks.
Blockchains are the future
At a New York Times DealBook event, BlackRock (BLK 0.55%) CEO Larry Fink surmised that "the next generation for markets, the next generation for securities, will be tokenization of securities."
With blockchains, traditional financial assets like stocks, bonds, real estate, or other commodities can be represented digitally on blockchains -- a process known as tokenization. Transactions involving these tokenized assets can be authenticated without the need for an institutional intermediary (like a bank or brokerage), and are recorded on a secure public database (the blockchain) in real time in a way that preserves the ownership history of the asset.
Fink said that tokenizing assets will be an attractive option due to "instantaneous settlement" and that bypassing intermediaries will "bring down fees even more dramatically." This could revolutionize how financial markets operate.
A new age of finance is underway
We are already starting to see the beginnings of this transition. In November, JPMorgan (JPM -0.40%) conducted an experimental cross-border transaction that utilized the Polygon (MATIC -3.43%) blockchain to tokenize Singaporean dollars, Japanese yen, and bonds from the two countries. The experiment -- the first of its kind -- was a resounding success, and proved that it would be possible for banks to migrate their everyday processes to the blockchain.
Even BlackRock is getting in on the action. In August, it made headlines after it announced that it would be offering its clients access to trade Bitcoin through a partnership with the cryptocurrency exchange Coinbase.
We are now beginning to see some of the largest financial institutions in the world start to utilize blockchains' potential. If trends like these continue, it could mark the beginning of a new age for cryptocurrency.
Crypto front-runners
This doesn't mean every cryptocurrency will benefit. Fink, for example, asserted that "most of these [cryptocurrency and blockchain] companies are not going to be around" for the long term.
To get a better idea of which cryptocurrencies might be in a position to benefit most from banks and other traditional financial institutions getting in on the blockchain game, we can look to the JPMorgan experiment.
As previously mentioned, it used the Polygon blockchain to settle those transactions. Part of the reason JPMorgan chose Polygon is because of its compatibility with Ethereum (ETH -1.73%). In addition to its programmable nature that allows for the tokenization of assets, Ethereum is broadly viewed as one of the most decentralized cryptocurrencies. Therefore, Ethereum seems likely to be a beneficiary of traditional finance adopting decentralized blockchain-based applications.
Should this nascent trend of old-school finance shifting its business into the world of crypto gain steam, cryptocurrencies like Bitcoin, Ethereum, and Polygon would be positioned to benefit the most. However, investors shouldn't expect their prices to rebound anytime soon, so this would be a great time to buy if you're prepared to hold on long enough to see the premise play out.
Right now macroeconomic factors are preventing most tokens from making price gains. But over the long haul, assuming headwinds such as high inflation and rising interest rates dissipate, these three cryptocurrencies have the most upside potential in a crowded field.
