The year 2021 started with a huge boom of cryptocurrencies. Still, it remains unclear what will happen in the course of the year. Is the next Bitcoin bubble about to burst?

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Will Bitcoin and Co. reach new highs? Nobody is able to provide an answer to a question of this kind. Nonetheless, I’ve tried to compile a few indicators.

Institutional Interest

The situation around Bitcoin and Co. changed in the last years. Institutional interest is significantly higher, while demand from speculative private investors is lower. In 2020, large institutions such as JPMorgan and Citi developed solutions to buy cryptocurrencies for their clients.

The trend is expected to accelerate in 2021, as many banks are already working on blockchain and digital payment solutions. This will ensure the entry of more players and attract conservative companies, which in the future will be able to invest in cryptocurrencies at their principal banks with a more comfortable gut feeling.

Also, major hedge funds made moves to get into cryptocurrency 2020, with Bitcoin leading the way. For example, the Guggenheim Funds announced a huge investment of $500 million in Bitcoin. More asset managers are set to follow, as prominent hedge fund managers such as Stanley Druckenmiller and Paul Tudor Jones caused a sensation when they finally stopped bashing bitcoin. In 2021, it is expected that large investment banks, pension funds, and asset managers will jump on the train and stock up on cryptocurrencies. Again, with Bitcoin leading the way. Since a variety of traditional financial instruments are now being linked with cryptocurrencies, major players can join the market too.

Private Interest

In the course of 2020, many cryptocurrency exchanges evolved and became more mature. Binance, Crypto.com, Coinbase, Bitpanda— just to name a few.

Years ago, it was much more difficult to find reliable and usable exchanges. Additionally, crypto exchanges have been robbed regularly and customers lost millions of funds. The risk is now much lower and the usability much higher. There are numerous regulated fiat-crypto exchanges and the number of people with accounts grew from 5 million in 2016 to over 100 million this year. Expecting this trend to continue in 2021.

Equally boosting this trend is also the fact that major tech players like PayPal and Square stepped in and started allowing payments in Bitcoin in late 2020. Both companies bought the equivalent of 100% of newly mined Bitcoins in 2020.

Digital Gold

Financial development supports the upward trend of Bitcoin & Co too, as the risk of inflation is high and this could lead to some serious regulations. This increases the interest in Bitcoin as a safe store of value. Even Forbes and Bloomberg are talking about Bitcoin as the “digital gold 2.0”.

The different functions of money have been described and specified more than a hundred years ago: - Medium of exchange- Measure of value- Standard of deferred payment- Store of value Since gold offers these properties, it is accepted as an alternative currency. Gold is particularly rare in times of merging monetary and fiscal policies and an incredible amount of printed money. The entire gold deposit mined to date would fit into a cube with an edge length of only 21.71 meters (197,575.7 tons, source www.gold.de, end of 2019). This natural scarcity is similar to cryptocurrencies like bitcoin, which is limited to 21 million units. It is therefore not surprising that bitcoin shares the same properties as gold in view of an expected inflationary environment. — Bitcoin and Social Standards, Maximilian Perkmann, Medium, 2021 Governmental Actions

2021 will be an important year for Central Bank Digital Currencies (CBDCs). The vast majority of central banks are now in favor of CBDCs. Central Bank Digital Currencies is an important part of the Digital Revolution.

The Digital Revolution (also known as the Third Industrial Revolution) is the shift from mechanical and analogue electronic technology to digital electronics which began in the latter half of the 20th century, with the adoption and proliferation of digital computers and digital record-keeping, that continues to the present day.[1] Implicitly, the term also refers to the sweeping changes brought about by digital computing and communication technology during this period. Analogous to the Agricultural Revolution and Industrial Revolution, the Digital Revolution marked the beginning of the Information Age.[2] — wikipedia.com

However, all eyes are on China in 2021, as the introduction of the digital yuan as a powerful CBDC is progressing rapidly. In the 2020 pilot phase, more than two billion RMB ($300 million) in over four million transactions were settled with the digital renminbi. The question is not whether, but how fast China will push this project further.

Photo by Ewan Kennedy on Unsplash Regulations

Authorities took cryptocurrencies much more seriously in 2020, especially in terms of crypto taxation. Germany, for example, has included cryptocurrencies in new law drafts for the first time.

In the U.S., things are even stricter: the U.S. Internal Revenue Service sent a questionnaire about crypto holdings to every American. Crypto exchanges are put on a short leash with the result that they either bend and implement strict control mechanisms or leave the U.S. Tax authorities around the world are increasingly issuing explicit crypto tax notices on profits from crypto trading or mining income.

Crypto-Development Ethereum 2.0

The second-largest cryptocurrency Ethereum recently switched to a new consensus mechanism. The new Ethereum 2.0 is much more energy-efficient and faster in transactions, this is made possible by the so-called sharding.

In the long term, the changes are also intended to increase the transaction capacity from currently 15 transactions per second to several thousand transactions per second. Blockchains that function according to “proof of work” are power-hungry. Bitcoin is criticized for this because the mining of coins worldwide already consumes as much energy as the whole of Algeria and has a CO2 emission that can be compared with that of Myanmar. Ether is also created through mining — mainframe computers crack complicated numerical puzzles, and their operators are rewarded with more and more ETH for providing the computing power. With Proof of Stake, this is supposed to change. — Is There Still Some Potential Left in Cryptocurrencies?, Maximilian Perkmann, Medium (Coinmonks) Stablecoins

2020 was a record year for stablecoins. With assets growing from less than $5 billion at the beginning of the year to over $25 billion in December, this momentum is expected to continue in 2021.

Data suggest that the use of stablecoins is already increasing in certain areas, such as between Latin America and Southeast Asia, where traders are using stablecoins for transactions, bypassing traditional banking channels entirely. In 2021, it will be interesting to see if this trend continues. The downside, however, lies in the question: is it possible for a cryptocurrency’s value to be linked to, say, the U.S. dollar, the euro, or the Swiss franc? There are already experts who doubt whether in times of crisis stablecoins are stable enough to be able to map to the fiat currencies 1:1.

DeFi

In 2020, decentralized finance experienced a boom. Decentralized Finance, or DeFi, stands for the combination of traditional financial concepts with blockchain technology. DeFi is about applying principles of finance to cryptocurrencies and distributed ledger technology.

DeFi instruments include crypto loans, currency swaps between cryptocurrencies (atomic swap), interest rate models, and stocks/bonds on the blockchain. DeFi has really exploded in 2020, with the total value of completed transactions (TVL) increasing from less than $1 billion in January 2020 to more than $15 billion today.

In 2021, DeFi will likely continue to grow. However, Decentralized Finance is currently only for specialists and crypto enthusiasts who study the content in-depth.

Photo by Ilya Pavlov on Unsplash Conclusion

We have seen in 2020 that the interest from institutions, governments, tech giants, and privateers has increased rapidly. China is even introducing a digital version of its currency and Pornhub relies exclusively on cryptocurrencies for its subscription payments now. Fair to say 2020 was a crazy year! Let’s see what 2021 has in store. I personally expect cryptocurrencies to evolve in a much more stable way.

Read also “Is The Next Bitcoin Bubble About to Burst?” (Medium, Maximilian Perkmann, Coinmonks) for some more analysis of the current Bitcoin hype.

The article includes the personal opinion of the author.

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