We Never See Nothing

The beginning of the pandemic immediately sparked rumors about a new financial crisis hitting the globe with all its might. Indeed, nobody knew how long it would take the world to combat COVID-19.

The government started the money creation process, and the US dollar index slid to the lowest level for the first time in the past few years. While the world economy continues suffering a recession, the crypto industry celebrates the new spike in its development.

Just take a look at how BTC has been growing throughout the year: 

Source: exmo.com

Indeed, 2020th became the tipping point for digital assets and prepared them for a new development twist. Here’s what has happened and how it determined the whole industry’s destiny in the upcoming year. 

2020th – the year when more and more people lost faith in fiat. 

When the pandemic began, the stock, gold, and Bitcoin markets dropped by around 30%. But unlike the other two, Bitcoin managed to return to its annual maximum pretty fast and outperformed other markets’ growth within months.

Source: https://www.tradingview.com 

In a time of panic, investors started a massive sellout of all assets, including crypto. It meant they already had had Bitcoin in their investment portfolios by that time and used it along with other traditional financial instruments.

Link to the source

After the world realized the pandemic consequences would last longer than expected and bring new challenges to the economy, the government set in motion standard emergency lifeline measures used in 2008th. 2020th became the year when over $9 trillion was injected into the US economy, which made up 22% of all US dollars created since the nation’s appearance.

Source: https://fred.stlouisfed.org/series/M1 

Morgan Stanley’s Global Head of Macro Strategy, Matthew Hornbach, forecasts the cumulative balance sheet of G4 central banks will expand to $29 trillion by the end of 2022, doubling the size that we observed in 2019.

Source: https://www.zerohedge.com/markets/central-banks-add-liquidity-worth-066-global-gdp-average-every-month-2021

Money ‘printing’ pumped up the economy to keep markets functioning. Yet nobody seemed to be thinking of the long-term consequences. The risk of inflation forced investors to start looking for other, more reliable assets to allocate their funds.

Here’s where Bitcoin came to the rescue. Its price skyrocketed even more, compared to traditional financial markets. And that was just the beginning. 

As the market hates uncertainty, the whole world froze, awaiting election results. Stock market and gold prices dropped again as a natural response to the election season, and everyone expected Bitcoin to follow the same falling trend, but nay.

As investors always keep looking for new opportunities, while the stock market and gold didn’t promise much return, it became a unique asset with huge potential.

The Bitcoin addiction buzz also raised as Paypal announced it would enable buying, selling, and holding digital currencies. Paypal owns a huge payment infrastructure and sets a new trend that will soon be supported by others.

Aside from this, more and more institutional investors are flocking in cryptocurrencies, raising the demand and making it more promising for others. As big players keep joining the game, the value of the whole cryptocurrency industry also keeps rising. 

Aside from external factors that have positively impacted Bitcoin price, there are some internal catalysts. After halving in May 2020, Bitcoin’s total computing power hit an all-time high of 121 EH/s, beating its previous record of 118 ET/s.

We all expected the Bitcoin network to drop significantly as the revenue cut usually squeezes the least efficient miner operators. But the trend proved otherwise, showing that even halving can’t stop the speed at which the whole industry is maturing.

Interestingly, according to Glassnode’s report on ASOL, the older coins are being transacted, signaling that long-term crypto holders finally realized the profit. Add the launch of Ethereum 2.0 and the DeFi boom of 2020 to this list, and you’ll see that the position of cryptocurrency has never been that close to mass adoption. 

The industry has gone through a lot in 2020, but much more is yet to come. Based on this small roundup, here’s what might be waiting for crypto right around the corner of 2021.

Bitcoin will be acknowledged as an international payment currency. 

As I have already mentioned, the biggest debit payment system PayPal has joined the crypto market, allowing its users to hold, buy, and sell digital currencies in its online wallets. The press release also states that beginning in 2021, Paypal customers will be able to use their crypto to pay at PayPal’s 26 million merchants worldwide with no incremental fees.

To address high volatility, the consumers will immediately be converting their crypto balance to fiat. With a PayPal user base of 340 million, we can assure you that mass adoption is finally here. 

The vaccine won’t make much impact on the crypto market as long as the institutional investors’ demand for Bitcoin is high.

The vaccine won’t be able to stop the bull run, even though it promises we’ll get back to the pre-crisis environment. If mass vaccination started in the nearest few months, it would positively impact the stock market in the first place.

Much liquidity will shift back, yet Bitcoin will still be used as a risk diversification asset. The price will soar on the same level as it has been before vaccination. If mass vaccination against COVID-19 isn’t proved effective or affordable to people worldwide, the economy will continue to struggle through the 2021st.

It means that most investors will continue using Bitcoin as an inflation hedge. Money from the stock market will be poured into gold and Bitcoin. And as Bitcoin keeps to mature, attracting more and more institutional investors, the odds are it will outperform gold sooner than we expect.

Both scenarios make a positive impact on the price of crypto in general. The demand for Bitcoin will increase, and as the supply has been cut in two this May, the price will skyrocket even more. 

Besides, the tremendous spike in interest of institutional investors has become the trend of 2020 that will keep propelling the price through 2021st.

In October 2020, a payment processing company Square Inc. announced it had purchased 4,709 BTC at an aggregate cost of $50 million. Business intelligence firm Microstrategy Inc. has put $475 million in cryptocurrency, which is now worth around $732 as Bitcoin price reached $19,000.

According to JPMorgan, MassMutual’s recent investment in Bitcoin signalizes the potential for increased institutional demand and broader adoption of crypto by wealthy investors, security firms, and pension funds. Fidelity Investments, Ark Investment Management, Grayscale, and other funds have added crypto to their portfolios. 

According to Grayscale’s report, in the third quarter, total investment into its products exceeded $1.05 billion, while in the previous quarter, investment flows reached its record of $905,8 million.

In general, since the beginning of 2020th, the investment inflow has made up $2.6 billion, which almost doubled the cumulative investment of 2013-2019s.

On average, weekly investment comprised $80.5 million, out of which Grayscale Bitcoin Trust (GBTC) gained $55.3 million and Grayscale Ethereum Trust – $15,6 million. The share of the last one increased from 15% to 19.4%. The total asset value of Grayscale Investments reached $6.3 billion. 

Reuters has also shared a fascinating report based on the data of CoinShares – the digital asset investing firm. Institutional investors turned out to have pumped $429 million in the largest crypto funds. It was the second-largest weekly inflow of ready cash into the crypto market. Interestingly that the first record high inflow of $468 million had been made three weeks earlier. 

Bitcoin will serve as a hedge against inflation and will take up the gold’s market share. 

JPMorgan Chase’s report shows that institutional investors consider Bitcoin a digital alternative to gold, which has long been a traditional hedge asset. In October, investment inflow in Grayscale Bitcoin Trust (GBTC) has increased exponentially, whereas investment in gold ETF has remained almost unchanged.

Source: https://twitter.com/Sonnenshein/status/1325218504258281472 

Moreover, now we see a massive inflow into crypto out of gold, and this trend will continue throughout 2021st, according to JPMorgan Chase & Co’s prediction.

They also say that the rise of the cryptocurrency market will come at the expense of gold. It sounds natural, given that Bitcoin is a more technologically advanced inflation hedge, while fiat will continue to suffer from the pandemic’s consequences. 

Ethereum 2.0 will mark a new wave of development for cryptocurrency and especially DeFi and stablecoins. 

Ethereum 2.0 is a new step in the mass adoption of crypto, which indicates the industry is developing extremely fast. With scalability and security issues addressed, Ethereum 2.0 becomes a very ambitious upgrade, given that no blockchain of the same size as Ethereum has previously tried to transition the whole ecosystem to an entirely new network while keeping an old one up and running.

Ethereum 2.0 creates favorable conditions for further development of the DeFi sector. As the industry keeps growing exponentially, more and more institutional investors will find digital assets extremely alluring. Moreover, Ethereum 2.0’s PoS model makes it especially attractive to investors interested in passive income opportunities. Staking implies the participation of each user who has acquired at least 32 ETH. The tokens will be blocked in the network for an indefinite amount of time, while their holders will be gaining the reward. If you compare this model to traditional finances, it’s going to work as a bank deposit. 

The regulatory grip will get tighter and the blockchain will split in two – white-chain and dark-chain. 

Strict KYC & AML policies for all EU and US-based crypto exchanges, FCA registration for businesses operating in the UK, and the governments’ multiple attempts to regulate the crypto industry were just the beginning.

For now, the biggest challenge the industry faces is the regulation of the DeFi sector, which not only provides an analog of traditional financial services but also poses a threat to the lawful use of digital assets. A flock of institutional investors to DeFi won’t start until we find ways to create a regulatory framework for this market. In investors’ heads, regulation equals security and is a #1 condition to attract big players. It finally gets clear what to expect from centralized projects, so all regulatory authorities’ efforts will focus on DeFi projects. More and more crypto businesses will realize that they will create a more open and transparent ecosystem by dialogue with regulators, increasing the demand for digital assets, and propelling technology’s advancement. 

But the more measures we apply to regulate crypto, the bigger split between the regulatory environment’s supporters and opponents will be. For now, as DeFi performs beyond regulation, there is a loophole for everyone who believes crypto should exist beyond the law. As more centralized exchanges implement KYC and AML policies to prevent illegal activities, decentralized exchanges will remain the only place to avoid it. Due to an enormous flock of dirty money into DeFi projects, many users risk experiencing difficulties while transferring money to centralized exchanges. Besides, DeFi won’t receive massive money inflow from institutional investors unless there are strict regulatory and compliance policies. 2021st will be a year when all the legal concerns of DeFi development will be figured out and addressed. 

Central banks will start issuing their own tokens.

If you can’t beat them, join them. That’s what the government is going to do. In 2021st, central banks globally will issue digital tokens to enter the speedy development of crypto assets, while China’s digital yuan is already pivoting this trend.

Widespread adoption of national tokens like yuan, will allow tracing money flows across the economy and preventing illegal activities, including terrorist financing and money laundering. But the key benefit of digital yuan remains easier internationalization of the currency. In general, national digital currencies will ensure better financial inclusion and faster cross-border payments. 

These are the trends that we surely should expect and be ready for in the upcoming year. 2020th has done a lot to the crypto industry, helping it thrive in terms of uncertainty. And 2021st is going to consolidate these results.

(Disclaimer: The author is the COO at EXMO)

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