After the baptism of major events in 2020, what is there to look forward to in 2021?
2020 was an unprecedented year for the world and the cryptocurrency community. Before launching the forecast for 2021, lets first briefly review the industry milestones of the past year and share the lessons learned.
2020 year in review
1. The big year of Bitcoin
Bitcoin has experienced roller coaster volatility in 2020. On Black Thursday in March, we saw the price of Bitcoin plummeted by 50% during the liquidity crisis caused by the new crown epidemic, and then rebounded strongly, until today it is still performing a parabolic rebound and sustained high volatility.
In May 2020, Bitcoin completed its third halving since its inception, which significantly reduced Bitcoin's inflation rate. This is different from the Olympic Games that was originally scheduled to be held in the same year but was forced to cancel. Bitcoin has been step-by-step in its halving plan, almost unaffected by the new crown epidemic.
2. The Summer of DeFi
How can you not mention DeFi (decentralized finance), the new favorite of the currency circle in 2020? This year has witnessed the enthusiasm for DeFi. It seems that new agreements and liquidity mining plans will be released every week. This is the fun of players during the lockdown period. By the end of the year, the TVL (total value of locked positions) in DeFi has risen from less than 700 million US dollars to more than 23 times to 15 billion US dollars.
In this research report, we also wrote detailed content on the topic of DeFi to outline the revolutionary and exciting characteristics of DeFi's currency Lego.
3. The dawn of liquid mining
In addition to the core principles of trustless and open source financial services, one of DeFi's biggest innovations is the concept of liquid mining. The idea that platform ownership belongs not only to the founders, but also to users and early supporters caters to all of us.
Many people who participated in liquidity mining this year felt that we are participating in starting new businesses, and the fact is the same-the founder of DeFi has developed the share distribution model to the extreme that we have never seen before. We believe that the effectiveness of liquid mining will have a significant impact on the entire cryptocurrency and financial system in the next few years.
4. Bitcoin is widely adopted by institutions
As the price of BTC keeps hitting new highs every day, we should review the events that created this round of gains. 2020 is a year worth remembering. It marks the beginning of mass adoption of cryptocurrencies. The first is that Microstrategy announced in August that it would use $250 million in cash reserves to invest in Bitcoin.
In addition to the entry of Microstrategy and Square, many institutions have announced their support for the development of cryptocurrencies. The most eye-catching is the Goldman Sachs Group, even if it did not want to recognize cryptocurrency in the past, it has appointed a new digital asset director. Fidelity International, one of the world's largest asset management companies, issued the first Bitcoin fund for high-end investors, and proposed to allocate 5% of its asset portfolio to Bitcoin. Citibank boldly predicts that BTC will exceed $300,000 by the end of 2021. Singapore's DBS Bank has decided to lead its competitors by launching its own digital asset exchange.
5. PayPal and the beginning of mass cryptocurrency adoption
In addition to the above financial institutions, there is another company that stands out, and that is PayPal. The company announced in October that its 300 million users can directly purchase cryptocurrencies. After cooperating with the Paxos exchange to open the service of buying coins, we have seen a large amount of PayPal's user funds flow into the cryptocurrency market, especially Bitcoin.
The impact of this wave of new Bitcoin investors cannot be underestimated. Eliminating the complicated lock-up procedures of fiat currency exchange stable currency or wire transfer to the exchange, PayPal efficiently opened up the encrypted currency to millions of users who once found it difficult to enter the market.
6. Ethereum 2.0
Ethereum 2.0 is the long-awaited upgrade for the ETH community. The summer's DeFi boom may have heralded the urgent need for the scalability upgrade of Ethereum. The best basis is that during the UNI airdrop, the Gas fee soared to 1000 gwei, making Ethereum network transactions inaccessible to people other than the "giant whale".
At present, more than 2 million ETHs are locked in the Ethereum 2.0 pledge contract for verification node mining. As of the writing of this manuscript, the value is more than 1.6 billion U.S. dollars, and the annualized book income exceeds 14%. We have already commented on the Ethereum 2.0 project in our June research report.
7. The supply of stablecoins exploded
One of the biggest changes in 2020 is that the cryptocurrency world increasingly relies on centralized stablecoins , especially Tether . The circulating supply of the world's most popular stablecoin has exceeded US$20 billion, accounting for 75% of the US dollar stablecoin market.
Whether you like it or not, the popularity of stablecoins is a necessary booster for the overall growth of cryptocurrencies. Centralized stable currency is still the most efficient conversion interface for fiat currency to encrypted currency. The sufficient liquidity of the US dollar as a global reserve currency makes the US dollar stable currency more reason to become the reserve currency of the cryptocurrency industry.
Whether the legal and regulatory issues of Tether and Bitfinex will cause USDT to end the initial bull market and fall into the altar, only time is left to answer. If Tether is again subject to a comprehensive account supervision review, or even an asset freeze, it will be bad news for the entire cryptocurrency industry.
8. China issues digital renminbi
Global central banks may still be in the tentative stage of developing CBDC (central bank digital currency), while the People's Bank of China is far from it. China's digital renminbi experiment has progressed rapidly in 2020, achieving a leap from the state of no issuance timeline a year ago to the deployment of pilot projects across the country.
CBDC not only means national monitoring, but also brings many economic impacts, which we have analyzed in the "CBDC Special Research Report". In general, CBDC will promote a stronger and more efficient payment ecosystem, at the cost of financial disintermediation. Most importantly, perhaps CBDC will promote the so-called'digital currency zone', that is, the extreme use of DCEP (digital renminbi) allows controlling central banks to swallow the monetary sovereignty of neighboring countries.
9. Cryptocurrency credit growth breaks record
In the past year, from futures insurance to on-chain and off-chain lending, all types of cryptocurrency credit have grown significantly. According to Skew Analytics, the amount of open interest in Bitcoin futures rose to over $10 billion by the end of 2020. DeFi credit companies Compound, Aave and Maker, and CeFi (centralized finance) players Genesis Capital and BlockFi have all recorded substantial growth in loan insurance.
The surge in credit coincides with the parabolic bull market in the cryptocurrency market as never before. Does this mean that the bursting of the credit bubble will lead to a wave of liquidation, thereby reducing the value of assets? We have already experienced this on Black Thursday in March, and we must be alert to the sell-off caused by credit risks.
On the other hand, a robust credit market attracts potential sellers to borrow cryptocurrency assets to reduce taxation, rather than selling them directly. We believe that the development of the cryptocurrency credit market is extremely important to the continued growth of the entire currency circle. For institutions to effectively provide liquidity, they need credit and derivative instruments.
10. Regulatory panic on exchanges
There are also setbacks besides progress. In October 2020, the US Department of Justice charged BitMEX executives with criminal charges of illegal money laundering. The US Commodity Futures Trading Commission filed a civil lawsuit against the exchange and followed up, accusing the company of violating AML (anti-money laundering) regulations.
Generally speaking, these events, no matter what happens in any other year, may severely impact investors' confidence in the cryptocurrency market. However, 2020 confirmed the attitude of cryptocurrency investors not to give up. The price of Bitcoin fell only briefly after these two events and then quickly recovered.
These incidents show that global regulators are battling the cryptocurrency industry. In 2020, under the guidance of FATF (Financial Action Special Organization), which has always been vigilant, jurisdictions around the world have begun to issue regulatory frameworks for virtual asset service providers.
2021 outlook
After the baptism of major events in 2020, what is there to look forward to in 2021? We have the following predictions.
11. Large-scale adoption of cryptocurrencies
Although we have seen the dawn of mass adoption in 2020, the retail adoption of cryptocurrencies still has huge room for development. According to our research, there are currently only 73 million cryptocurrency holders in the world, which is a far cry from the global population of 7 billion.
In mid-2020, the number of new investors pushing Bitcoin to a historical high is not large. The vast number of retail and institutional investors with trillions of dollars in funds are still on the sidelines, meaning that the adoption of cryptocurrencies is just beginning. According to statistics from the World Economic Cooperation Organization, 37 member countries have a total of 32 trillion US dollars in pension assets. If 5% of this is allocated to Bitcoin, there will be an inflow of $1.6 trillion, which is more than 3 times the total market value of cryptocurrencies. Although it is still far from this goal, let us wait and see!
12. The growth of cryptocurrency brokers/custodians and asset management service providers
As institutions such as PayPal and banks continue to provide cryptocurrency services to their users, the assets of leading brokerages, custodians and asset management service providers will experience explosive growth. When some institutions enter the cryptocurrency market, they will ask promotion agencies for assistance, while others tend to rely on asset management service providers such as Grayscale.
13. DeFi continues to grow
In the current BTC bull market, DeFi seems to have retreated to the second line after experiencing the frenzy at the end of 2020. Please note, however, that even if DeFi's revenue has fallen, its TVL has remained high. DeFi will definitely maintain its upward trend.
In fact, even considering the increasing risks that investors are taking, investors are suffering from nowhere to put their assets in a low interest rate economic environment with no end in sight, so DeFi returns are still quite attractive.
We believe that DeFi will continue its high growth in 2021. This part of TVL will attract more and more integrators and decentralized asset management service providers, so that investors can enjoy the returns.
14. NFT (Non-Homogeneous Token)-Art, collectibles, and tokenize everything
If DeFi gives way to mainstream currencies, NFT can be regarded as a cold reception in 2020. Until the ETH community turned its attention to DeFi, NFT was also sought after, and trading activities showed an upward trend at the end of the year.
As more issuers join and new platforms emerge, we think NFT (especially digital collectibles and artworks) will maintain growth in 2021. If you need to refresh your knowledge of NFT, please refer to our research report published in November. We will share more information in this field soon, so stay tuned!
15. Scalability of smart contract chain
Although the Ethereum 2.0 beacon chain was released in December, there is still a long time before Phase 1 and Phase 2 go online. At that time, Ethereum will need a solution for expansion, or a smart contract chain of a competitor will be used as a risk replacement. At present, the market firmly believes that the solution for the second layer expansion of Ethereum will be the final decision.
The solutions worthy of attention are: Plasma, Sidechains, ZK-Rollups, Optimistic Rollups. There are also some competing chains that are compatible with Ethereum, such as Avalanche, Polkadot and Cosmos.
We expect that some activities will migrate to alternative chains with robust ecosystems, such as Polkadot, in 2021. Crypto.com Chain benefited from the Particle B accelerator support after the mainnet launch, and can also become a candidate. If the second-layer expansion solution fails, or the Ethereum 2.0 project encounters more resistance and delays, the above replacement process will accelerate. At least until now, Ethereum is still the focus of attention.
16. Development of the global regulatory framework
As cryptocurrency enters the mainstream view, we expect that all custodians in the cryptocurrency industry will face further supervision, and non-custodians will also be subject to preliminary supervision (especially through FATF transfer regulations). After all, the biggest fear of regulators is the loss of retirement funds for the silver-haired people.
Entering 2021, we are confident that regulators will begin to require service providers to obtain operating licenses. This will increase the compliance cost of service providers, and those who are most adaptable to the new environment will benefit.
17. Cryptocurrency options usher in the golden age
As cryptocurrency is adopted by institutions, cryptocurrency derivatives will become popular. Just like the laws of traditional financial markets, as investors become more mature, trading tools will become more complex. We expect cryptocurrency options to skyrocket in 2021.
Conclusion
The above is my humble opinion on counting the major events of the currency circle in 2020 and looking forward to the new year.