For cryptocurrencies and fintech however, 2020 has been a good year and a record-breaking one for Bitcoin (BTC) prices in particular. Analysts expect that in 2021, there will continue to be heightened interest in crypto as adoption increases. As the year comes to a close, we have compiled our highly anticipated crypto and blockchain predictions for the year 2021.
1. ‘The Year of the Network effect’ - Crypto and Blockchain Taking Hold
2. Asia continuing to lead global adoption trends
3. Central Bank Digital Currencies taking hold
4. Stablecoin Growth
5. SuperApps and their Growing Interconnectivity with the Digital Asset Class
6. The US Securities and Exchanges Commission will approve the first bitcoin ETF (exchange-traded fund)
7. Privacy Coins
8. The Expansion of Crypto Derivatives
9. Institutional Crypto interests - Volume and Custodians
10. Further DeFi Demand
11. Borrowing and Lending
Over the past year there have been two kinds of growth in the sector.
The first is the actual adoption of blockchain technology, especially in the DeFi space. New solutions have come onto the market, such as the Oracle and Chainlink partnership, and they have proven to be more sophisticated and innovative than anything we have seen before and given a new lease of life to the sector.
As both blockchain and crypto often go hand in hand, the rise in crypto prices has been mirrored in the growth of blockchain too. Aside from the substantial gains made by BTC in 2020, Ether (ETH) also appreciated significantly, as DeFi projects built on the Ethereum network became popular.
In 2021, we anticipate that the sustained maturation of enterprise and broader blockchain applications will expand interest in associated coins through 2021, just as was seen with ETH in 2020.
The second kind of growth that we will continue to see is the expansion of institutional investment interest into the crypto asset class. It’s important to remember that the customers and clients of large institutional players will see their ingresses into the crypto-sphere as votes of confidence and an endorsement of the sector. Prospective retail investors are closely watching the uptick in institutional activity in the space to gauge market growth and future potential. A broad network effect in both crypto and blockchain coupled with institutional growth is likely to spur retail interest and vice versa.
Asia has been a fertile region for cryptocurrency and blockchain adoption from the start, and this is expected to continue and expand into digital currency adoption too. Asia boasts a very ripe startup ecosystem, particularly in Singapore and Hong Kong. This, paired with the region's consistently high number of crypto investors as well as companies that are eager to engage in meaningful blockchain implementation, primes the region for its most active year in 2021.
Asia is also leading the world in Central Bank Digital Currency implementation, and the global forerunner in this space is definitively China. The People’s Bank of China has made clear that the Digital Yuan is essential to breaking the monopoly of the US dollar, and is an important tool for the internationalisation of the currency. China will likely roll out the Digital Yuan Central Bank Digital Currency at meaningful scale in 2021. This will allow for widespread adoption of the world's first digital national currency. There may also be full wallet support from digital wallet giants Alipay and WeChat Pay, which will further drive greater comfort with and adoption of digital currency technologies. Japan, the second largest economy in Asia, has been involved in talks to implement similar projects, as has Thailand. In Europe, the Bank of England is expected to be one of the first to make a move towards a digital currency, in light of Brexit. It is unlikely we will see a digital dollar soon, as the US Federal Reserve is moving at a notably slower pace than its international counterparts. It will be very interesting to see how the digital yuan starts to play into some of the economies that have been kept out of US dollar settlements, particularly in sanctioned countries.
Stablecoins are central to bringing new users into the crypto space and in broadening investor participation in the digital asset class as a whole. With Central Bank-led fiat printing policies expected to remain a fixture in 2021, stablecoins allow investors to on-ramp through fiat. The market capitalisation of mainstay USD-pegged stablecoins, such as USDC and USDT are likely to grow substantially in 2021. Facebook's Diem (formerly known as Libra) is also anticipated to launch in 2021, which will be a momentous development for mainstream adoption of the asset class. The US dollar
After observing the progress of the Digital Yuan, many commentators are now beginning to speculate as to whether WeChat Pay and Alipay will start to support transactions via the CBDC (alongside the state's digital yuan wallet). If implemented, compatibility between SuperApps and the Digital Asset Class will give rise to an integration trend which will likely be replicated in further markets in which SuperApps are emerging. These will be the payment vehicles of the future, disintermediating the banking sector and providing a direct route from central bank to businesses and consumers.
Earlier this year, SEC Chairman Jay Clayton (who is due to step down at the end of 2020), announced that the regulator is interested in studying the investment rationale of listing Bitcoin ETFs (exchanged traded funds). The outgoing Chair of the Federal Reserve, Jay Powell, has stated that it is now the right time to start paying more attention to Bitcoin ETF’s.
These remarks demonstrate a turning point in the crypto and blockchain narrative. There are new promises of collaboration, efficiency and a much-anticipated move for US investing fast-approaching. With the rapid expansion of the crypto derivatives market already underway, ETFs are the next logical advancement in the mainstreaming of the digital asset class. With formal regulation, ETFs will bring crypto into a fully-fledged ecosystem alongside the conventional financial ecosystem. Increasing interest, as seen by for example the recent launch of a Bitcoin ETN on the Deutsche Boerse by Van Eck, is leading to the re-examination of BTC ETFs in the U.S.
We expect 2021 to be the year when at least one Bitcoin ETF becomes regulated by the SEC. As the U.S. represents the world's largest financial market, the launch of BTC ETFs would be a critical juncture for the crypto industry globally.
As crypto exchanges increasingly opt for regulation, privacy coins are expected to see more delisting pressure. This will partially be because of increased focus from governments around the world to shut off any potential routes for money laundering, and an increased requirement to enforce AML and KYC regulations. Exchanges that have not already delisted privacy coins will likely begin to do so in 2021.
We are likely to see a much broader offering of crypto derivatives in 2021. As the demand for more reliable returns increases for volatile assets, broader subsets of derivative products will begin to be rolled out. Some of these products may include variance swaps and volatility hedging products. These products are expected to enter the market in the coming year. Wealth managers within the structured product space are expected to seek out capital guaranteed and Bitcoin-linked products to offer to their customers.
In 2020, large institutions such as Citibank and JP Morgan became increasingly active in the space. This shift is entirely different in tone from the climate surrounding cryptocurrencies in 2017. Institutional participation gives a strong signal to the market that cryptocurrencies are legitimate. Following in the footsteps of established institutions, private banks, hedge funds, and family offices will increase their interest in crypto.
This will also be a positive signal for custodians, and in the UK, the FCA has already provided an exemption for some cryptoasset custodians, including for example Digivault, to operate under existing money laundering regulations – a critical step towards full licensing.
Custody will begin to play a more important role as we see larger institutional adoption of this asset class. It is expected that M&A will become more prominent in the custody space next year, especially in respect to banks acquiring custodians to gain more understanding of the regulatory framework.
As regulators apply the FATF travel rule, and more exchanges try to get regulated, we will start to see more interest next year and an increased demand for DeFi protocols in which KYC and AML criteria are not being applied. Whether that is good or bad for the sector will always be a debate, but as regulation in one sector grows, it often translates into growth into an (as yet) unregulated sector.
In terms of the balances being lent in the crypto space, we expect the space to expand by 10x in the coming year. This means that assets that are being lent out will go from circa $10 billion today to about $100 billion in 2021. As cryptocurrencies see more demand, and for Bitcoin in particular, the need to get access to an asset with a fixed supply will increase, spurring on the demand for borrowing and lending services.
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