While many industries and companies came under heavy pressure this year due to the corona-related economic crisis, 2020 turned out to be a jubilee year for the cryptocurrency market. There are many indications that this positive dynamic will continue into 2021. These are the 10 trends that I believe will shape the crypto year 2021.
Hedge funds and family offices are rushing to buy cryptocurrencies
In 2020, large hedge funds took concrete steps to enter cryptocurrency, above all Bitcoin. For example, the Guggenheim Funds Trust registered with the US Securities and Exchange Commission to be allowed to invest 10% of the total investment directly in Bitcoin for its Grayscale Bitcoin Trust (GBTC). This enables the Guggenheim hedge fund to invest $ 500 million in Bitcoin with the approval of the financial market regulator. More asset managers will follow, as prominent hedge fund managers such as Stanley Druckermiller and Paul Tudor Jones caused a stir when they swung around, stopped bitcoin bashing for good and touted the world’s largest cryptocurrency as a store of value.
For 2021, it is expected that large investment banks, pension funds and asset managers will jump on the bandwagon and stock up on cryptocurrencies, especially Bitcoin. The development is accelerated by the fact that a large number of regulated, traditional solutions on financial markets in the form of classic funds and indices with coupling to crypto currencies, which enable large players to include the new asset class of crypto in their portfolio. Examples of this are the CME Bitcoin Futures in the USA and European providers such as B. the Postera Fund listed in Liechtenstein. Even the Vienna Stock Exchange, which until recently saw Bitcoin more as the “best of evil” than as an investment product, listed the first products in September 2020 that directly map the Bitcoin price. B. with their 21Shares AG Bitcoin ETP.
With the numerous crypto exchanges regulated by financial regulators happy to serve 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 in 2021.
Buying Bitcoin has never been easier
“Where can I buy Bitcoins?” I have heard this question often in the last few weeks, and so do 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 and a 24-hour trading volume of around 9 billion US dollars, followed by the US -Crypto exchange Coinbase with 2 billion, both solid crypto exchanges, where Bitcoin can easily be bought and which are strictly supervised by the financial authorities. Austria also plays along, because Bitpanda, based in Vienna, trades around 1.8 million per day.
In the years 2014 to 2017, it was much more difficult to find reliable exchanges. Crypto exchanges were regularly robbed by hackers, customers lost millions in money, often small investors who put their savings on Bitcoin. The risk is now much lower, the user friendliness 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.
This development is also boosted by the fact that large tech players such as PayPal and Square have stepped in and have also been allowing payment transactions in Bitcoin since the end of 2020. Both companies bought up the equivalent of 100% of the newly mined bitcoins in 2020 just to meet their own demand from US customers. Further payment service providers will follow in 2021, which will have a lasting positive effect 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 forbidding their citizens to withdraw their own money. This increases the interest in Bitcoin as a safe store of value. Even Forbes, Bloomberg and the German Handelsblatt speak of Bitcoin as “digital gold 2.0”.
Love story between traditional 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 develop solutions for the purchase of crypto currencies for their customers, and regular reports are made on this new asset class of “digital assets”.
It is expected that this trend will accelerate in 2021 as many banks have already been working on blockchain and digital payment solutions in their back rooms, but now they are making their crypto plans public. This will ensure the entry of further players and attract conservative companies who in future will not only be able to invest in stocks and bonds with their house banks, but from 2021 also with a better gut feeling in crypto currencies.
While the major 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. The first players in Europe were the Swiss Falcon Private Bank AG and the Liechtenstein bank Frick, who have wanted to get customers excited about Bitcoin since 2018 and offer solutions for blockchain startups. Most large private banks, however, have so far paid little attention to Bitcoin as an asset that should not be taken seriously, but their high-net-worth and family office customer bases are increasingly asking for cryptocurrencies, so that the private banks will create corresponding offers for their classy customers in 2021.
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. Digital central bank currencies are an important building block of the digital revolution. The major central banks are coming under pressure from two sides: Facebook founder Mark Zuckerberg is relying on his digital currency Diem, formerly Libra. With the 2.4 billion Facebook users, a currency issued by Zuckerberg could spread quickly and threaten the local currency system in economically weaker countries.
However, all eyes will be on China in 2021, as the introduction of the digital yuan as the powerful CBDC is progressing rapidly. In the 2020 pilot phase, more than two billion RMB (300 million US dollars) were processed in over four million transactions with the digital renminbi. The question is not whether, but how quickly China is pushing this project forward.
Europe and the USA are hesitant about CBDCs: the first research projects have started, a serious implementation of a CBDC is not expected before 2030. This indecision could prove fatal because China will try to force its digital currency on the world: In future, goods orders from China could only be made with the digital yuan. For China, the world’s largest export country, the digital yuan is an enormous opportunity to design payment processes according to its wishes, to gain control over financial flows abroad and to further reduce the supremacy of the US dollar.
The tax authorities provide clarity on crypto taxation
Tax authorities took cryptocurrencies much more seriously in 2020, particularly with regard to crypto taxation. Since 2020, the German federal government has decided in an amendment to the law to explicitly take crypto trading into account for the first time. To this end, Germany has expanded the Banking Act, which regulates the lending business of credit institutions and financial service providers, and has included crypto values such as tokens and coins in the standard. Companies and small investors should also benefit from the change in the law, as they can in future entrust their crypto assets to a provider who is under the supervision of the Federal Financial Services Agency (BaFin).
In the USA things are even stricter: the US tax authorities sent a questionnaire about crypto holdings to every American, crypto exchanges are being put on a short leash, with the result that they either bend over and introduce strict control mechanisms or leave the USA and looking for customers elsewhere in the world. Tax authorities around the world are increasingly giving explicit crypto tax information on profits from crypto trading or mining income.
In Austria, the startup Blockpit relies on automated crypto tax reports. The Blockpit app is linked to the cryptocurrency exchanges and regular tax reports are received, which are sent directly to the authorities. This solution also opens up a look at the development of the tax consulting industry: In the world of crypto currencies, applications are available that make tax consulting largely obsolete.
Crypto unicorns become crypto corporations
Despite the economic crisis, 2020 was an impressive year for company 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 turn into crypto octopuses and spend parts of their profits to buy more companies.
Blockchain and crypto-related M&A activities will shift from the US to Asia in 2021 due to the better regulatory situation. In addition, the USA is scare away crypto startups through sensational court cases. Last week the US regulator SEC announced a lawsuit against the fourth largest cryptocurrency, Ripple. Ripple founders allegedly issued an unregistered security with their XRP token, the amount in dispute was 1.3 billion US dollars.
PWC Asia reports that 57 percent of M&A deals on blockchain and cryptos in the first half of 2020 were in Asia-Pacific countries and Europe, the Middle East and Africa, up from 51 percent in 2019 and 43 percent in 2018 The trend will continue to intensify in 2021 and Asia will increasingly form the epicenter of developments for cryptocurrencies and blockchain technologies.
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 with transactions, this is made possible by so-called sharding. The changeover to sharding and the new consensus mechanism of the “Proof of Stake” (ETH2) will take place gradually, with significantly more data being able to be stored on the Ethereum 2.0 blockchain in 2021.
The number of transactions per second can be increased significantly, so that new industrial applications are possible. Mikrosoft has announced that it will use Ethereum for its gaming app from 2021. Ethereum 2.0 could also serve as a basis for digital central bank currencies in the future. For example, the blockchain experts from ConsenSys are currently working with the currency regulator of Hong Kong and the central banks of Thailand and Australia on CBDC solutions on Ethereum.
Lawyers instead of nerds: crypto startups are consolidating
The first generations of crypto startups came from the tech sector, chief technical officers and ingenious nerds were in charge. Many of the larger crypto companies have changed their strategy since 2018 and started to organize themselves better and build a classic corporate structure. The main focus was on a 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 start-ups. A shirt, suit and red wine go with the T-shirt, hoodie and beer.
It is foreseeable that this trend will continue in 2021. However, the crypto industry is constantly moving up and down, because “crypto never sleeps”: In contrast to stock and bond markets, crypto currencies can be traded around the clock and the industry is developing many times faster than traditional financial services. Managers in the old business world have to get used to acting outside their comfort zone and reacting quickly to new market developments.
With the newly hired managers in the pinstripe, new style is making its way into blockchain companies, which will contribute to further growth and sustainability. However, in 2021 many crypto startups will still not survive the transformation from pioneering phase to consolidation, and competition will be tougher.
Do stablecoins remain stable coins?
2020 was a record year for stablecoins. With wealth growing from less than $ 5 billion at the beginning of the year to over $ 25 billion in December, that momentum is expected to continue into 2021. All eyes are on the US tether and other Fait currencies linked cryptos.
Data suggests that the use of stablecoins is already increasing in certain corridors, such as between Latin America and Southeast Asia, where merchants are using stablecoins to conduct transactions while completely bypassing traditional banking channels. In 2021 it will be interesting to see if this trend continues. The downside, however, lies in a question that the fiat world also knows: is it possible to link a cryptocurrency to the US dollar, euro or Swiss franc, for example? There are already expert opinions who doubt whether stablecoins are secured enough in times of crisis to be able to convert Fiat to crypto at any time 1: 1.
Because discrepancies could arise that we know only too well: Black markets for stablecoins, where the supposedly stable coins are traded well below their value. Or when investors artificially increase the value of stablecoins and the interests of the stablecoins issuers are fundamentally different from those of their users. Regardless, the trend towards stablecoins will continue in 2021, with Tether (USDT) at the top, USDC from Coinbase and Circle, TrueUSD and the eccentric DAI from MakerDao, which is backed by algorithmic trading and smart contracts.
ICOs are dead, long live DeFi!
In retrospect, the popular and later discredited Initial Coin Offerings as a financing option for blockchain startups turned out to be flies in the pan. Some start-up companies were able to raise large sums of start-up financing by issuing tokens. However, 99 percent of the ICOs failed, mostly because the blockchain business did not generate enough profits or because the business models simply turned out to be utter nonsense.
In 2020, Decentralized Finance experienced a boom that is very reminiscent of ICOs of the years before. Decentralized Finance, or DeFi for short, stands for the connection of classic financial concepts and products from banks with blockchain technology. DeFi is about transferring principles of the financial world to cryptocurrencies and distributed ledger technology.
DeFi instruments are crypto loans, currency exchange between cryptocurrencies (atomic swap), interest rate models and stocks and bonds on blockchain. The run on DeFi applications started in 2019, the DeFi trend is not only noticeable in the increased use of the respective apps, about three percent of all ethers are currently stored in DeFi. DeFi exploded in 2020, with the Total Value of Transactions Completed (TVL) increasing from less than $ 1 billion in January 2020 to more than $ 15 billion today.
Important applications of DeFi are Chainlink, Dai, Aave, Uniswap, Sushi, 0x, Wrapped Bitcoin and Compound.
DeFi is likely to continue growing in 2021. At the moment, however, Decentralized Fiance is only something for specialists and crypto fans who study the content in depth. Institutional investors are still leaving DeFi out in 2021 and are looking at the development from the sidelines.
