While many industries and companies came under heavy pressure this year due to the Corona-related economic crisis, 2020 turned out to be a jubilant year for the cryptocurrency market. There are many indications that this positive momentum will continue in 2021. These are the 10 trends that I believe will shape the crypto year 2021.
1. Hedge funds and family offices rush into cryptocurrencies
In 2020, major hedge funds made concrete moves to get into cryptocurrency, with Bitcoin leading the way. For example, the Guggenheim Funds Trust filed with the U.S. Securities and Exchange Commission to be allowed to invest 10% of its total investment directly in bitcoin for its Grayscale Bitcoin Trust (GBTC). This allows the Guggenheim hedge fund to invest $500 million in Bitcoin with the approval of the Financial Industry Regulatory Authority. More asset managers are set to follow, as prominent hedge fund managers such as Stanley Druckenmiller and Paul Tudor Jones caused a stir when they took a swing, finally stopped Bitcoin bashing and touted the world’s largest cryptocurrency as a store of value.
In 2021, it is expected that large investment banks, pension funds and asset managers will jump on the bandwagon and stock up on cryptocurrencies, with Bitcoin leading the way. Accelerating the development is the fact that a variety of regulated, traditional solutions on financial markets in the form of classic funds and indices coupled with cryptocurrencies, allowing major players to include the new asset class of cryptos in their portfolios. Examples include the CME Bitcoin Futures in the U.S. and European providers such as the Postera Fund Crypto I Fonds listed in Liechtenstein. Even the Vienna Stock Exchange, which recently saw Bitcoin as a “best of evil” rather than an investment product, listed its first products directly tracking the Bitcoin price in September 2020, e.g., with its 21Shares AG Bitcoin ETP.
With numerous crypto exchanges regulated by financial regulators happy to service such funds, as well as crypto brokerage solutions, many of which did not exist during the last bull market three years ago, the field is set for a new boom in crypto trading in 2021.
2. Buying Bitcoin will be easier than ever before
“Where can I buy Bitcoins?” This is a question I’ve heard a lot in recent weeks, and the same goes for my crypto-savvy friends and acquaintances. And now the answer is easier for me than it was a few years ago, because the range of cryptocurrency exchanges has become more diverse: The largest exchange is Binance, based in Malta, with a 24h trading volume of about 9 billion US dollars, behind it comes the US crypto exchange Coinbase with 2 billion, both solid crypto exchanges where bitcoin can be easily bought and which are strictly supervised by the financial authorities. Austria is also in the game, with Bitpanda, based in Vienna, trading about 1.8 million per day.
In 2014 to 2017, this was much more difficult to find reliable exchanges. Crypto exchanges were regularly robbed by hackers, customers lost millions in funds, in many cases small investors who bet their savings on Bitcoin. The risk is now much lower, the ease of use high. There are numerous regulated fiat crypto exchanges, also the number of people with accounts grew from 5 million in 2016 to over 100 million this year and this trend will continue in 2021.
Additionally boosting this trend is also that major tech players like PayPal and Square stepped in and started allowing payments in Bitcoin in late 2020. Both companies bought the equivalent of 100% of newly mined Bitcoins in 2020, just to meet their own the demand they receive from US customers. More payment service providers will follow in 2021 which will have a lasting positive impact on the crypto market.
Macroeconomic developments support the upward trend of Bitcoin & Co, because the risk of inflation is high and could lead to some states prohibiting their citizens from withdrawing their own money. This increases the interest in Bitcoin as a safe store of value. Even Forbes, Bloomberg and the German Handelsblatt see in Bitcoin some kind of “digital gold”.
3. Love story of banks and Bitcoin
2020 was marked by the entry of institutional players into the crypto market. Large institutions such as JPMorgan, Deutsche Bank, and Citi are developing solutions to buy cryptocurrencies for their clients, regularly reporting on this new asset class of “digital assets.”
This trend is expected to accelerate in 2021, as while many banks were already working on blockchain and digital payment solutions in their backrooms, they are now making their crypto plans public. This will ensure the entry of more players and attract conservative companies, which in the future will be able to invest in cryptocurrencies at their principal banks not only in stocks and bonds, but also with a more comfortable gut feeling from 2021 onwards.
While the large investment banks have been the most active players so far, it is to be expected for 2021 that private banks in particular will increasingly enter the Bitcoin and cryptocurrency derivatives business. Players of the first hours in Europe were the Swiss Falcon Private Bank AG or the Liechtenstein-based Bankhaus Frick, which already wanted to attract customers to Bitcoin since 2018 and offered solutions for blockchain startups. However, most large private banks have paid little attention to Bitcoin as a non-serious asset, but their high-net-worth and family office customer base are increasingly asking for cryptocurrencies, so private banks will create relevant offerings for their noble clientele in 2021.
4. Central Bank Digital Currencies: China is three years ahead of us
2021 will be an important year for Central Bank Digital Currencies (CBDC). The vast majority of central banks are now in favor of CBDCs. Central bank digital currencies are a key component of the Digital Revolution. The major central banks are being squeezed from two sides: Facebook founder Mark Zuckerberg is backing his digital currency Diem, formerly Libra. With Facebook’s 2.4 billion users, a currency launched by Zuckerberg could spread rapidly and threaten the local currency system in economically weaker countries.
However, all eyes are on China in 2021, as the introduction of the digital yuan as a powerful CBDC is progressing rapidly. In the 2020 pilot phase, more than two billion RMB ($300 million) was transacted in the Middle Kingdom in over four million transactions using the digital renminbi. The question is not if, but how fast China will move forward with this project.
Europe and the U.S. are hesitant about CBDCs: initial research projects have been launched, but serious implementation of a CBDC is not expected before 2030. This indecision could prove fatal, as China will try to impose its digital currency on the world: Goods orders from China in the future could only be made with the digital yuan. For China, as the world’s largest exporting country, the digital yuan is an enormous opportunity to shape payment processes according to its wishes, to gain control over financial flows abroad and to further push back the supremacy of the US dollar.
5. Treasury provides clarity on crypto taxation
Tax authorities took cryptocurrencies much more seriously in 2020, especially with regard to crypto taxation. Since 2020, for example, the German government decided to explicitly take crypto trading into account for the first time in an amendment to the law. To do so, Germany amended the German Banking Act, which regulates the lending business of credit institutions and financial services providers, and included crypto-assets such as tokens and coins in the standard. Businesses and retail investors are also likely to benefit from the change in the law, as they will be able to entrust their crypto assets to a provider that is under the supervision of the German Federal Financial Supervisory Authority (BaFin).
In the U.S., things are even stricter: the U.S. Internal Revenue Service sent a questionnaire about crypto holdings to every American, crypto exchanges are put on a short leash with the consequence that they either bend and implement strict control mechanisms, or leave the U.S. and seek customers elsewhere in the world. Around the world, tax authorities are increasingly issuing explicit crypto tax notices on profits from crypto trading or mining income.
In Austria, the startup Blockpit relies on automated crypto tax reports. People link the Blockpit app to cryptocurrency exchanges and receive regular tax reports that are sent directly to the authorities. This solution also provides a glimpse into the evolution of the tax consulting industry: apps are available in the cryptocurrency world that make tax consulting largely obsolete.
6. Crypto-unicorns turn into crypto-multinationals
Despite the economic crisis, 2020 was an impressive year for corporate sales. Data shows that the total value of crypto mergers & acquisitions in the first six months of 2020 has already surpassed the total value of 2019, with the average transaction value increasing from $19.2 million to $45.9 million. This trend will continue in 2021 as crypto unicorns increasingly become crypto octopuses, spending portions of their profits to acquire more companies.
Blockchain and crypto-related M&A activity will shift from the U.S. to Asia in 2021 because of the better regulatory situation. In addition, the U.S. in particular is scaring away crypto startups with sensational court cases. Last week, the US regulator SEC announced a lawsuit against the fourth largest cryptocurrency Ripple. Ripple founders allegedly created an unregistered security with their XRP token, amount in dispute US$1.3 billion.
PWC Asia reports that 57 percent of blockchain and crypto M&A deals in the first half of 2020 were in Asia-Pacific and Europe, the Middle East and Africa, up from 51 percent in 2019 and 43 percent in 2018. The trend will continue to strengthen in 2021, with Asia increasingly becoming the epicenter of developments for cryptocurrencies and blockchain technologies.
7. Ethereum, the blockchain of the industry.
The second largest cryptocurrency Ethereum recently switched to a new consensus mechanism. The new Ethereum 2.0 is much more energy efficient and faster in transactions, this is made possible by the so-called sharding. The switch to sharding and the new Proof of Stake (ETH2) consensus mechanism will happen gradually, with much more data being able to be stored on the Ethereum 2.0 blockchain in 2021.
In the process, the number of transactions per second can be significantly increased, enabling new industry applications. Microsoft has announced that it will use Ethereum for its gaming app starting in 2021. Ethereum 2.0 could also serve as a basis for digital central bank currencies in the future. The blockchain experts at ConsenSys, for example, are currently working with the monetary regulator of Hong Kong, as well as with the central banks of Thailand and Australia on CBDC solutions on Ethereum.
8. Lawyers instead of nerds: crypto startups consolidate
The first generations of crypto startups came from the tech sector, with chief technical officers and genius nerds calling the shots. Many of the larger crypto companies changed their strategy since 2018 and started to organize themselves better and build a classic corporate structure. The priority was stringent strategy, improved communication, adequate investor information and legal security. Therefore, lawyers and financial market professionals were hired to bring order to the often chaotic crypto startups. T-shirt, hoodie and beer are joined by shirt, suit and red wine.
It is foreseeable that this trend will continue in 2021. However, the crypto industry is in constant up and down motion because “crypto never sleeps”: cryptocurrencies, unlike stock and bond markets, can be traded around the clock and the industry is evolving many times faster than traditional financial services. Executives in the old business world have to get used to operating outside their comfort zone and reacting quickly to new market developments.
With the freshly hired managers in the pinstripe, new style is entering blockchain companies, which will contribute to further growth and sustainability. However, in 2021, many crypto startups will still not survive the transformation from pioneering to consolidation, and competition will become fiercer.
9. Will stablecoins remain stable coins?
2020 was a record year for stablecoins. With assets growing from less than $5 billion at the beginning of the year to over $25 billion in December, this momentum is expected to continue in 2021. All eyes will be on the U.S. Tether and other cryptos tied to fait currencies.
Data suggests that the use of stablecoins is already increasing in certain corridors, such as between Latin America and Southeast Asia, where traders are using stablecoins to conduct transactions, bypassing traditional banking channels entirely. In 2021, it will be interesting to see if this trend continues. The downside, however, lies in a question that the fiat world is also familiar with: is it possible for a cryptocurrency’s value to be pegged to, say, the U.S. dollar, the euro, or the Swiss franc? There are already expert opinions that doubt whether even in times of crisis stablecoins are collateralized enough to be able to exchange fiat for crypto on a 1:1 basis at any time.
This is because discrepancies could arise, which we know all too well: Black markets for stablecoins, where the supposedly stable coins trade far below their value. Or when investors artificially inflate the value of stablecoins and the interests of the stablecoin issuers are fundamentally different from those of their users. Regardless: The stablecoin trend will continue in 2021, with Tether (USDT) leading the way, USDC from Coinbase and Circle, TrueUSD, and the oddball DAI from MakerDao backed by algorithmic trading and smart contracts.
10. ICOs are dead, long live DeFi!
The popular and later discredited Initial Coin Offerings as a funding opportunity for blockchain startups turned out to be flash in the pan in retrospect. While some startups were able to raise large sums of seed funding via token issuance. However, 99 percent of the ICOs failed, mostly because the blockchain business did not turn a profit quickly enough or because the business models simply proved to be complete bullshit.
In 2020, Decentralized Finance experienced a boom very reminiscent of ICOs of the years before. Decentralized Finance, or DeFi for short, stands for the combination of traditional financial concepts and products from banks with blockchain technology. DeFi is about applying principles of finance to cryptocurrencies and distributed ledger technology.
DeFi instruments include crypto loans, currency swaps between cryptocurrencies (atomic swap), interest rate models, and stocks and bonds on blockchain. In 2019, the run on DeFi apps started, the DeFi trend is not only noticeable in the increased usage of the respective apps, currently circa three percent of all Ether is stored in DeFi. DeFi has really exploded in 2020, with the total value of completed transactions (TVL) increasing from less than $1 billion in January 2020 to more than $15 billion today.
In 2021, DeFi will likely continue to grow. However, Decentralized Fiance is currently only for specialists and crypto enthusiasts who study the content in depth. Institutional investors will still leave DeFi out in 2021 and watch the development from the sidelines.
Linkedin: Robby Schwertner