As we watch 2020 growing smaller in our rear-view mirrors, many people have been relieved to commit last year to history. However, while it will always be remembered as a time of tremendous disruption and hardship, 2020 was the year that cryptocurrency really came into its own in earnest. If the overriding narratives of the past 12 months were decentralized finance (DeFi) and institutional adoption, what’s on the cards as we enter a new year and beyond?
Increased institutional adoption
In 2020, institutional demand for bitcoin (BTC) and other digital assets really began to pick up the pace, with several monumental events standing out. The United States’ Office of the Comptroller (OCC) allowing U.S. banks to offer cryptocurrency custody services was of huge significance, lending legitimacy to the space and allowing institutions to deal with the familiar regulated entities they know and trust.
We saw giant payment services provider PayPal enter the cryptocurrency market in October, allowing its U.S. users to purchase bitcoin and other cryptocurrencies, giving this asset class exposure to millions of everyday people. And major firms like MicroStrategy, Guggenheim, and Square began accumulating bitcoin and adding it to their balance sheets. As bitcoin prices reached a new all-time high just shy of US$42,000, and major exchanges saw record trading volumes even with the sharp pullback that followed, this momentum is only just beginning.
MicroStrategy has purchased approximately 314 bitcoins for $10.0 million in cash in accordance with its Treasury Reserve Policy, at an average price of approximately $31,808 per bitcoin. We now hold approximately 70,784 bitcoins.https://t.co/zMJSH29bmC— Michael Saylor (@michael_saylor) January 22, 2021
More and more hedge funds, traditional investment banks, pension funds and family offices will invest in bitcoin for their customers. In fact, 2021 has already seen the entrance of SkyBridge Capital’s Bitcoin Fund teaming up with Fidelity as its custodian to offer an alternative to Grayscale for large investors. The U.S. Treasury’s Office of the Comptroller of the Currency has also made another significant move in January allowing national banks to use stablecoins and blockchains for faster settlement of payments.
We’re seeing analyses and opinions almost daily in the mainstream media from respected participants like JPMorgan and Citibank calling for bitcoin prices to reach anywhere between US$146K and US$300K by the end of 2021 — along with a prediction that billions of dollars will transfer from gold into bitcoin this year.
At the same time, the USD increased its money supply by a staggering 33% in 2020, 20% of that in the first seven months. With the perfect storm of macro factors surrounding cryptocurrencies right now highlighting their worth as a store of value against depreciating fiat, 2021 looks set to see increased institutional adoption.
Crypto becomes more mainstream
With the 2017 bull run, we still had many crypto skeptics around saying that cryptocurrency would fail and calling BTC and other major coins a “scam,” a “fraud,” and a “bubble.” However, even though a grueling bear market followed, we began to see many of these opinions change (JPMorgan is perhaps the most obvious that comes to mind).
On reflection, they had reason to be cautious. During the initial coin offering (ICO) boom, the space was largely unregulated and many unsuspecting investors lost their money to fraudulent rogue projects. People were less aware of their security and hackers and scammers abounded. Networks clogged up and the many immaturities and inadequacies of the industry were highlighted.
But since then, we have seen the industry change beyond recognition. Of course, no investment is risk-free and as we have seen from the rise in decentralized finance (DeFi), it’s still easy to lose your money if you’re too hasty to part with it. However, from the massive unregulated ICO days, we have seen an about-turn in capital raising that would have been unthinkable just three short years ago.
As the industry gains acceptance from regulators, institutions and major names, we’re also seeing companies in the space preparing to go public. These IPOs will bring mainstream recognition to the still-nascent crypto sector and it’s likely that we will see more crypto companies following this path this year. With a changing of the guard at the SEC, it’s also quite possible that 2021 will, at last, be the year of the bitcoin ETF.
More products cater to institutional investors
Now that the institutional trend is clear, in 2021, we will see companies in this space tailoring and extending their offering to suit a different class of investors. This includes advanced trading tools and extensive derivatives products that allow investors to hedge their risk and maximize capital gain, as well as have the ability to cross-collateralize their positions and manage their portfolios more effectively.
Institutional traders require advanced products such as portfolio margin that allow them to manage all their accounts, trades and crypto assets from one single interface. Along with more custodial services and advanced derivatives markets, we will see products such as these becoming the norm in 2021. The derivatives sector will also continue to grow and eventually surpass the size of the spot market.
New record price highs
With bitcoin prices already blasting through its previous all-time-highs, this is perhaps an easy prediction to make. However, while this bull run will likely see less of a frenzied “alt season” than we saw in 2017 and 2018, I believe that many cryptocurrencies are likely to mark new all-time-highs this year.
The astounding pace of development and achievements in the DeFi sector, in particular, cannot be overlooked especially as Ethereum (the driving force behind DeFi) looks to resolve its high-fee model and scalability issues with ETH 2.0.
These record-high prices may be both institutional and retail-driven. However, I believe that we will see them mainly in projects with proven track records, or at least, strong fundamentals, regulatory clarity, and high potential.
See related article: ‘Crypto Mom’ Hester Peirce calls for more regulatory coordination
Of course, nothing is certain and cryptocurrencies remain highly volatile (as we have been starkly reminded by the 20% bitcoin price correction earlier this month and dramatic drop in the crypto market cap). Investors should always keep this in mind and never invest more than they are prepared to lose.
Strong growth in blockchain adoption
The global blockchain market size is expected to grow from US$3 billion in 2020 to US$39.7 billion by 2025, at a compound annual growth rate (CAGR) of an impressive 67.3% during 2020 to 2025 as blockchain adoption by businesses and governments accelerates.
According to a study by Deloitte in 2020, business leaders no longer see blockchain technology as merely “promising.” It is now an integral part of their organizational innovation, with 55% of organizations stating that blockchain was now a top five strategic priority. From a regional perspective, China is still leading the global blockchain race and looks set to continue in 2021.
The digital transformation of organizations has shifted to a priority that has been sped up by the effects of the pandemic. Businesses will no longer work in the same ways as before and blockchain projects with clear benefits are expected to increase efficiency and accelerate this process.
This means that we will see large growth in private blockchains rather than public blockchains as enterprises need higher efficiency, reliability, and privacy — with authorization granted only to certain persons inside and outside of the organization.
The acceleration of CBDC projects
With Covid-19 taking up so many of the headlines last year, the fact that central bank digital currencies (CBDCs) continued to make progress was somewhat cast into the shadows. However, beyond the major steps made by China already with its DCEP digital yuan and smaller countries such as Barbados with its “Sand Dollar,” other countries will begin speeding up their CBDC efforts here.
See related article: China’s blockchain network adds CBDC payment layer, ConsenSys as partner
The Bank of International Settlements (BIS) reported last year that 80% of central banks worldwide were researching the pros and cons of CBDCs. The European Central Bank is expected to make a clear decision on a digital euro in mid-2021. As the use of cash further diminishes, again accelerated by the pandemic, and the economy becomes increasingly digitized, CBDCs will play a greater role this year.
With a (more or less) established legal framework surrounding bitcoin, regulators will spend plenty of time in 2021 examining other crypto projects and potentially holding more of them to account. With many vulnerabilities in the technology and investors losing money, the DeFi space is also likely to come under regulatory pressure.
This input from regulators will be a welcome move as long as we don’t begin to see regulatory over-reach such as the proposed FinCEN rule for unhosted wallets that’s still being debated currently.
See related article: Janet Yellen clarifies stance, notes ‘benefits of cryptocurrencies and other digital assets’
As long as regulators are willing to work with participants in the cryptocurrency space to establish sustainable regulation that does not crush innovation, their input will be good for the industry — and essential, if we are to see increased maturity, legitimacy, and the longevity of institutional demand.