Beginning in 2021, there has been a huge boom in cryptocurrency. However, it is still unclear what will happen this year. Is the next " Bitcoin bubble" about to burst?
Will Bitcoin and other cryptocurrencies hit new highs? For such a question, no one can provide an answer. Nevertheless, I tried to sort out some indicators.
Institutional interest
In the past few years, the situation surrounding Bitcoin and other cryptocurrencies has changed. Institutional interest has increased significantly, while speculative private investors have lower demand. In 2020, large institutions such as JP Morgan Chase and Citigroup have developed solutions to purchase cryptocurrency for customers.
This trend is expected to accelerate in 2021, as many banks are already studying blockchain and digital payment solutions. This will ensure the entry of more people and attract conservative companies, which will be able to invest in cryptocurrency in banks more conveniently in the future.
In addition, major hedge funds have also joined the army of investing in cryptocurrencies in 2020, with Bitcoin topping the list. For example, the Major Hedge Fund announced a huge investment of $500 million in Bitcoin. More asset management companies will follow up. Famous hedge fund managers such as Stanley Druckenmiller and Paul Tudor Jones finally stopped criticizing Bitcoin, causing a sensation. It is expected that in 2021, large investment banks, pension funds and asset management companies will jump on this train and hoard cryptocurrencies. Similarly, with Bitcoin at the top. Since various traditional financial instruments are now linked to cryptocurrencies, major companies can also join this market.
Personal interest
In the course of 2020, many cryptocurrency exchanges have developed and become more mature, Binance, Crypto.com, Coinbase, Bitpanda, etc.
A few years ago, it was much more difficult to find a reliable and available exchange. In addition, crypto exchanges often fail and customers lose millions of funds. Now, the risk is much lower and the availability is much higher. There are many regulated cryptocurrency exchanges, and the number of people with accounts has grown from 5 million in 2016 to more than 100 million this year. This trend is expected to continue in 2021.
Also driving this trend is the intervention of major technology companies such as PayPal and Square, which will begin to allow payments in Bitcoin at the end of 2020. The two companies purchased 100% of newly mined bitcoins in 2020.
Digital gold
Financial development also supports the upward trend of Bitcoin and companies, because the risk of inflation is high, which may lead to some serious regulation. This has increased people's interest in Bitcoin as a secure store of value. Even Forbes and Bloomberg are talking about Bitcoin as "digital gold 2.0."
The different functions of currency have been described and prescribed more than a hundred years ago.
Medium of transaction
Value measurement
Deferred payment standard
Store of value
Because of these characteristics, gold is accepted as currency.
Gold is particularly rare in an era when monetary policy and fiscal policy are combined and the amount of money printed is astonishing. All the gold deposits mined so far can be packed into a cube with a side length of only 21.71 meters (197,575.7 tons, source www.gold.de , end of 2019).
This natural scarcity is similar to cryptocurrencies such as Bitcoin, and the limit of Bitcoin is 21 million. Therefore, given the expected inflation environment, it is not surprising that Bitcoin shares the same attributes as gold.
Government action
2021 will be an important year for central bank digital currency (CBDC). Currently, most central banks support CBDC. Central bank digital currency is an important part of the digital revolution.
The digital revolution (also known as the third industrial revolution) refers to the transition from mechanical and analog electronic technology to digital electronic technology since the second half of the 20th century, with the application and popularization of digital computers and digital records. Continuing to this day also implies the comprehensive changes brought about by digital computing and communication technology during this period. Analogous to the agricultural revolution and the industrial revolution, the digital revolution marked the beginning of the information age.
However, all eyes are on China in 2021, because the introduction of digital renminbi as a powerful CBDC is advancing rapidly. In the pilot phase in 2020, 2 billion RMB (300 million USD) of more than 4 million transactions were settled in digital RMB. The question is not whether it is, but how fast China will further promote this project.
Supervision
The authorities will pay more attention to cryptocurrency in 2021, especially in crypto taxation. For example, Germany included cryptocurrency in a new draft law for the first time.
In the United States, things are even stricter: The Internal Revenue Service of the United States sends out a questionnaire about cryptocurrency holdings to every American. As a result of the shelving of crypto exchanges, they either succumbed and implemented strict control mechanisms or left the United States. Tax authorities around the world are increasingly issuing clear crypto tax notices on the profits of crypto trading or mining revenue.
Development in the field of encryption Ethereum 2.0
Ethereum, the second largest cryptocurrency, recently switched to a new consensus mechanism. The new Ethereum 2.0 is more energy efficient and faster in transactions, which is achieved through sharding technology.
In the long run, these changes are also aimed at increasing the transaction capacity from the current 15 transactions per second to several thousand transactions per second.
The blockchain that operates according to PoW (Proof of work) consumes a lot of power. The reason why Bitcoin is criticized is that the energy consumed by mining coins on a global scale is equivalent to that of the entire Algeria, and its carbon dioxide emissions are comparable to Myanmar. Ethereum was also created through mining-large computers cracked complex digital puzzles, and its operators received more and more Ethereum rewards for providing computing power.
With PoS (Proof of Stake), this situation should change.
Stablecoin
2020 was a record year for stablecoins. Assets have grown from less than US$5 billion at the beginning of the year to more than US$25 billion in December, and this momentum is expected to continue in 2021.
The data shows that in some regions, the use of stablecoins has increased. For example, between Latin America and Southeast Asia, traders use stablecoins for transactions, completely bypassing traditional banking channels. In 2021, it will be interesting whether this trend will continue. However, the disadvantage lies in a question: Is it possible for the value of cryptocurrencies to be pegged to the US dollar, euro, or Swiss franc? Experts have already doubted whether stablecoins are stable enough during the crisis and whether they can be exchanged with fiat currencies 1:1.
DeFi
In 2020, decentralized finance has experienced a prosperous period. Decentralized finance, or DeFi, represents the combination of traditional financial concepts and blockchain technology. DeFi is to apply the principles of finance to cryptocurrency and distributed ledger technology.
DeFi tools include crypto lending, cryptocurrency exchange, interest rate models, and stocks/bonds on the blockchain. DeFi completed its real explosion in 2020, and the total value of completed transactions (TVL) has increased from less than $1 billion in January 2020 to more than $15 billion today.
In 2021, DeFi may continue to grow. However, decentralized finance is currently only suitable for experts and crypto enthusiasts who have studied the content in depth.
In conclusion
We see that in 2020, the interest of institutions, governments, technology giants and private equity institutions increased rapidly. China has even launched a digital version of currency, and Pornhub now completely relies on encrypted currency for subscription payments. It can be said that 2020 was a crazy year! Let us look at the situation in 2021. I personally expect that cryptocurrency will develop in a more stable way.