Living through 2020 feels like a once-in-a-generation event, what with everything that’s happened. The emergence of a global pandemic that halted entire economies was just the start. It’s been quite the year for cryptocurrency and blockchain too. So what can be foreseen happening in the next 12 months?
Bitcoin to $50k: global institutions to pile trillions into BTC
2020 truly was the year that institutions finally set out their stall to hold a proportion of their vast wealth in Bitcoin.
Asset management giant Ruffer confirmed in December it had bought £550 million of Bitcoin for its Multi-Strategy Fund, around 2.7% of the British firm’s total assets under management. It made the near-45,000BTC buy as a hedge against currency deflation, it said, and no wonder given that central banks including the US Federal Reserve conspired to institute effectively infinite quantitative easing in 2020.
The big money just keeps on coming. US cloud software and business analytics giant Microstrategy kicked up a storm by informing markets it had bought $425 million of Bitcoin in September 2020. Then three months later it said it had invested the entirety of a $650 million debt sale into Bitcoin, bringing the company’s total treasury reserves to 70,470BTC, or $1.596 billion.
What could this mean for the retail price of Bitcoin? Certainly it means greater support at current levels.
Bitcoin has broken its all time highs and a psychologically-important resistance level above $20,000 per coin. Speaking of possible targets, outlandish price predictions for Bitcoin have been a staple of the industry ever since the cryptocurrency first arrived on the financial scene.
They have never come to pass to date. True, scarcity is baked into the Bitcon model. But it is possible to be bullish without getting ridiculous.
Like the compound growth of an investment, nothing much seems to be happening in the first few years. But when it breaks, it breaks strongly to the upside.
Analysts at all the major banks are now — finally — starting to realise that the exponential price curve of Bitcoin is not only possible, but all but certain. Citibank lit up social media in November 2020 as the first major analysis house to make a six-figure price prediction, saying Bitcoin could hit $300,000 by the end of December 2021.
And now that hugely powerful institutions have devoted a portion of their wealth to Bitcoin, they too are getting into the prediction game. Scott Minerd, the influential manager of Guggenheim Partners, told Bloomberg that Bitcoin should be worth $400,000 per coin, based on its scarcity and its value relative to gold.
This is no half-baked ‘TO THE MOON’ tweet. These are serious predictions from the world’s richest people. Allow us to be cynical for a moment: now that institutions and their ultra-high net worth clients are building large positions in Bitcoin, BTC has been co-opted as part of the fundamental architecture of the finance world. And they have a serious interest in seeing the price rise.
There are reasonable doubts that we will see Bitcoin at hundreds of thousands of dollars per coin. That alone would create thousands of paper millionaires. But we could easily see Bitcoin travel a long way north, now that the $20,000/BTC resistance has been breached, and this psychologically-important level turns from resistance to support.
Tokenised stocks and fractional shares
The idea to use blockchain architecture to settle trades across national and international stock exchanges has morphed into the use of the technology to tokenise equities themselves.
This means taking in-demand but hugely expensive stocks like Tesla, Airbnb and Apple and breaking them down into much smaller, fractional pieces. Then each piece, or derivative, can themselves be traded back and forth. This allows investors and traders much broader exposure to the biggest shares on the market.
Take the share price of Amazon, for example. Individual investors find it hard to trade Amazon shares because the list price is so high. It costs $3,200 to buy a single Amazon share. Imagine instead being able to trade 0.1% of an Amazon share – costing just $3.20 — instead of having to put down a four-figure buy? It opens up the world’s most popular shares to vastly more liquidity.
With the growth of mobile-first, easy-access crypto-friendly trading accounts like Robinhood, traders are now younger and more active across a wide variety of markets.
FTX, the Hong Kong cryptoexchange was the first to cross the Rubicon in October 2020, launching a novel way to trade these massively popular stocks, launching Bitcoin pairs against
Tesla, Amazon, Apple and the like.
Each token represents a fraction of one share, meaning traders are able to trade half a share at a time if they like, CEO Sam Bankman-Fried said.
FTX, incidentally, made its name by launching a series of viral derivatives markets. Perhaps its most famous launch was two competing tokens: TRUMPWIN and TRUMPLOSE. Buying either token allowed non-US residents to bet on the outcome of the 2020 US election.
Providing the backbone for FTX’s novel tokenised stock market was CM Equity AG, a German investment management firm which is licensed by the German regulator BaFIN. It was no surprise, then, to see that CM was also behind the latest exchange to offer tokenised stock derivatives, Bittrex.
Bittrex announced on 7 December it would offer derivatives on these stocks: Tesla, Apple, Amazon, Netflix, Google, Covid-19 vaccine producer Pfizer, Facebook, and Chinese giant Alibaba.
This seems to be a massive growth market in 2021.
NFT markets: the new DeFi?
NFT or ‘Non-fungible’ tokens are emerging as the biggest trend in the blockchain industry and will take full hold in 2021.
‘Fungible’ is one of the main properties of money. Essentially it means that one unit of a currency: one dollar, one pound sterling or one euro, for example, can be swapped out for any other unit of that same currency and still hold the same value.
Non-fungible tokens, by contrast, are characterised by being a share in a limited physical asset which can’t be swapped out for any other token. Owning a non-fungible token or NFT therefore gives the holder the rights to a portion of an asset. The largest market for NFTs is in digital collectibles. And everyone from private businesses to state-run enterprises are now waking up to the possibilities of generating huge revenues from selling blockchain-based NFTs. Austria Post, the postal service of Austria, was one of the first to enter the market, issuing a limited edition collectible NFT stamp that sold out within days. The scheme was so popular that the £2bn market cap company repeated the feat with an expanded offering.
The Croatian Postal Service and the United Nations Postal Administration are among those to issue NFT collectible stamps in 2020, too. Even central banks are realising the possibilities here. In July 2020 the Bank of Lithuania issued a limited-edition collectible digital coin to commemorate the country’s 1918 independence. As TechCrunch reports, the size of the collectibles market is now approaching $400 billion. And proving ownership and provenance of important items of sports memorabilia, artwork, games or toys is a major issue for auction houses and secondary markets. Having a blockchain record of ownership that cannot be forged is a revolutionary improvement on a centuries-old marketplace. No wonder the major London auction house Christies made the leap to sell its first ever NFT item in October 2020, parting with a Satoshi Nakamoto-inspired artwork for $130,000.
While markets like OpenSea and Rarible have sprung up to trade digital collectibles, volume is low and regulatory protection uncertain. It is reasonable to expect new players from the traditional finance world to come in and set up their own marketplaces to take best advantage.
ETH and Proof of Stake
It’s clear to us that ETH and proof of stake blockchains will be the big winners next year. Investors are showing remarkable interest in the ETH 2.0 beacon chain, which is the first part of Ethereum’s switch away from Proof of Work to Proof of Stake. On the first day of the architecture change, 1 December 2020, 27,000 validators came forward to stake over $400 million in ETH to support the new chain, four times larger than it required.
Of course Ethereum’s move to Proof of Stake is a multi-year campaign which could take until the mid-2020s to be fully realised. But the environmental and energy efficiencies of Proof of Stake over Proof of Work mean that it is likely to gain the acceptance of the most powerful regulators and policy-makers on earth. One intergovernmental organisation has already made clear it wants Proof of Stake blockchains to succeed. In a November 2020 report, the 37-country OECD body outlined its support for Proof of Stake, noting that using staking to secure blockchains instead of mining for block rewards “could help to reduce energy use while also addressing scalability and latency issues.”
The authors write: “Due to differences in design, Ethereum, the second-largest virtual currency by market value, processes more than twice as many transactions as the bitcoin network while using less than one-third of the electricity consumed by Bitcoin.”
So how will staking continue in 2021? In the absence of individuals running their own ETH 2.0 validation node — and we would expect this to be the exception rather than the rule — investors who want exposure to ETH 2.0 without all the hassle of their own perma-online staking setup will turn to exchanges and middlemen.
San Francisco cryptoexchange Kraken reported on 8 December 2020 that its clients had put forward 100,000ETH (~$60m) for its new ETH 2.0 staking service. And we would expect fractional ETH staking/pooling services like Lido and Rocketpool to help capture retail interest in ETH 2.0.