While 2020 has been a very difficult year, it has, ironically, been a catalyst year for fintech and crypto.
And there are no signs of the momentum slowing down in 2021!
Here are my 10 crypto predictions for the coming year:
1. China leading the CBDC and future of money race
As we predicted , 2020 was a banner year for central bank digital currencies (CBDCs). With 80% of central banks active on and the invisible pressure from Libra (now called ), which is expected to launch , we should expect to see a lot of new developments in this space.
While wholesale CBDC developments are important, the focus of central banks will probably center on retail CBDCs, as that is the real game-changer. Unlike wholesale CBDCs that are just between a central bank and banks and that operate “behind the scenes” from the public’s perspective, retail CBDCs allow the public to hold a truly digital form of central bank money, something that does not exist today. Just as 2020 saw some countries from the to the grab headlines with some of their retail CBDC initiatives, we should expect other G20 countries to announce their own plans.
But in practice, all eyes in 2021 will be on China as it continues to move forward with its digital renminbi (called ), blazing the trail when it comes to the future of money. In its last pilot phase, more than of value (US$300 million) were transacted via 4 million transactions using the digital RMB. The big question may be not if but how quickly China continues to move forward on this project.
2. Traditional financial institutions (and private banks) falling in love with bitcoin?
2020 was an incredible year when it came to the entry of institutional players in the crypto space. Not only did we see large institutions such as and continue to build solutions for clients, many, from to , even began regular coverage of the asset class.
We should expect this trend to accelerate in 2021 as many banks begin to make their crypto plans public. This should further catalyze the entry of traditional buy-side firms that are not only more comfortable trading with such regulated intermediaries but, in many cases, are obliged by their own regulatory or investor restrictions.
While investment banks have been the most active players so far, we should keep an eye on private banks. Most of the large private banks bitcoin as not a serious asset (not having crypto-related products to sell probably did not help!) but we should expect the forward-looking private banks to adapt and see crypto as a differentiator offering to engage and drive new revenue from the much-coveted high-net-worth and family office client base that is increasingly to buy bitcoin.
3. The taxman provides crypto tax clarity
As we correctly predicted , 2020 saw ground-breaking developments in crypto taxation. The U.S. Internal Revenue Service sent a questionnaire covering crypto holdings to every American, while organizations such as the Organization for Economic Co-operation and Development published on the topic.
As the “” showed, an increasing number of tax authorities around the globe are providing explicit crypto tax guidance. And while almost none of them provide guidance on topics like crypto borrowing and lending or crypto staking, the majority now provide guidance on areas like capital gains on crypto or mining income. Expect the level of tax clarity to improve in 2020.
This is a positive for the industry because tax clarity is important for giving comfort to institutional investors. On a practical level, many retail and professional traders made gains with the rise of crypto markets in recent months, representing an opportunity for tax authorities to take what they believe is due, especially in such a difficult economic environment!
4. Crypto M&A turning crypto unicorns into crypto octopuses
Despite the economic crisis, 2020 was an impressive year for . Data suggests the total value of crypto M&A in the first six months of 2020 has already the total from 2019, with the average deal size increasing from $19.2 million to $45.9 million.
We should expect crypto M&A activity to continue in 2021, particularly with crypto unicorns increasingly becoming crypto octopuses and spending some of their bull market gains and acquiring or investing in firms that offer ancillary services to their current offerings.
And these crypto octopuses may be increasingly swimming in Asian waters in 2021, as an ever-increasing percentage of such crypto M&A deal activity continues to , with 57% of deals occurring in Asia-Pacific countries, and in Europe, the Middle East and Africa in the first half of this year, up from 51% in 2019 and 43% in 2018.
5. Retail investors (and my mom!) can finally buy bitcoin easily
“Where should I go to buy bitcoin?” Anyone in crypto regularly gets this question from friends and family. My mom is a great example. After I gave her a bitcoin as a gift a couple of years ago, she desperately tried to understand what I do for a living. The reality is that it has never been to buy crypto. Not only are there numerous regulated fiat-to-crypto exchanges in most countries now, but the number of people with accounts at such exchanges from only 5 million in 2016 to over 100 million this year.
Of course, the elephant in the room here will be large tech players like and that continue to make it easy for people to buy bitcoin and other crypto assets. These two firms alone are buying the equivalent of of newly minted bitcoin just to cover the demand they are getting from U.S. customers. When some of these platforms open to international customers next year, their impact will be interesting to measure.
And many of the macro economic developments, from the record levels of to countries blocking their citizens from their own money, are raising interest in bitcoin. 2020 saw a record of bitcoin wallets, so we should not be surprised to see this record be broken in 2021.
6. Traditional hedge funds and family offices rushing into crypto
2020 saw large hedge funds, from to , take a serious look at entering the space, while several prominent public hedge fund managers, from to , made headlines by talking up bitcoin as a store of value.
We should expect this to accelerate in 2021, driven by a multitude of regulated and “traditional” solutions that allow such players to get exposure to the asset class, from to the listed crypto products. (Grayscale is a sister company to CoinDesk.)
And with the numerous regulated and institutional focused crypto exchanges that are now happy to service such funds, as well as crypto prime brokerage , many of which did not exist during the last bull market three years ago, the table is set for a potential boom in crypto trading by traditional hedge funds in 2021.
7. Crypto derivatives exchanges growing up
Outside crypto, the size of the derivatives market is multiple times that of spot markets. This is not the case yet with crypto markets. Although there are many crypto derivatives exchanges, very few of them are regulated or would pass operational due diligence by institutional investors.
In 2021, crypto derivatives will be an area to watch. Open interest on bitcoin futures on the has recently been at record highs and will be a good barometer of investor appetite going forward.
This space still offers a lot of opportunities for firms that understand the institutional-grade requirements, from counterparty risk mitigation and high-speed connectivity to being regulated. That will provide great opportunities not only to existing players (many of whom have been quite quickly) but also to potential new entrants and traditional institutions.
8. Move away, Hoodies: Here come the Suits to professionalize the industry
Many in the first generation of crypto entrepreneurs came from tech backgrounds. But now, many of the larger crypto firms have decided to institutionalize by bringing aboard individuals with institutional financial services backgrounds to run their businesses, with numerous recent examples from crypto native firms like to new ventures like Diem.
We should expect this trend to accelerate in 2021. However, the crypto industry is a sink or swim environment. Crypto markets never sleep, firms operate 24/7 and the industry evolves numerous times faster than traditional financial services, meaning executives need to be comfortable in continuously operating outside of their comfort zones.
Some will be able to adapt and be very successful in building the next bridge towards the future of money. But many will not make the cut and may realize they prefer the comfort of “traditional” finance with its comfortable after-market hours and free weekends.
9. New regulations driving traffic to DeFi
As last year, decentralized finance, or DeFi, exploded in 2020, with total value locked (TVL) from less than $1 billion in January to more than $15 billion today. Some months, trading volumes on certain DeFi exchanges were than those at some of the large traditional exchanges.
In 2021, DeFi is likely to grow further. While it is unlikely we will see institutional investor interest in the sector, the dedicated group of folks from the crypto community working in this exciting area will continue to make breakthroughs. Some of the features of DeFi, like , for example, give us an opportunity to reimagine financial services with a first-principles approach.
One area to watch will be the impact of new regulations, from the travel to the potential ban of crypto retail trading in certain , which may inadvertently drive traffic to such offerings.