As 2020 has already been a record year for the digital assets industry, what is 2021 going to look like? Looking forward, there are several trends we can see advancing from last year, while others will surely arise in an industry that is ever-changing and developing.

During times of an economic downturn due to the global pandemic, demand for digital assets has increased by bank stimulus packages and investors seeking safe stores of value against increasing monetary inflation. While for a long time, cryptocurrencies were most appealing for retail investors, a large proportion of financial institutions are now assessing investments for Bitcoin (BTC) and will diversify into other digital assets in 2021. Governments are going to move forward with state-backed digital currencies, and private stablecoin initiatives will gain momentum on the back of public support. The decentralized finance (DeFi) sector will again be one of the biggest winners in 2021, moving closer to centralized finance (CeFi) and the traditional financial market, opening up major opportunities for the industry and citizens around the world. Further, the developments in DeFi will spill over into other application fields such as non-fungible tokens (NFTs) and tokenized securities.

However, without public support, there cannot be real change. Therefore, regulation and lawmakers will play a crucial role this year in the development of the whole digital asset and blockchain industry.

Digital assets market value increase sees no end

The new year has just started, and we’ve already seen quite interesting developments. The total digital assets market value (calculated by market capitalization) has hit a record of over $1 trillion for the first time ever. At its prior peak in late 2017, the value was just above $760 billion.

Digital assets market capitalization evolution (USD)

Source: Coindesk, 2021

The majority of this increase can be attributed to Bitcoin, representing around 70% of the total market cap. The last quarter of 2020 already saw the price of BTC surge amid positive market sentiment and reached one all-time high after another - ending at $27k at year-end. The first days of 2021 even sent it over $41k, plunging again, and now stabilizing around $34k. Bitcoin is and will still be the number one digital asset in the world in 2021. However, while the oldest cryptocurrency recently led in terms of price movements, other assets have begun to show significant gains as well.

Ether (ETH), the second-largest digital asset, made it in the world’s top 100 assets by market capitalization. With its price coming closer to its all-time high of 2018, and a $135 billion circulating supply, the cryptocurrency is prone to make its own headlines this year. New products (CME’s ETH future launch in February) and advancing developments (moving to a proof-of-stake blockchain) will help push this asset to new heights. More interesting, however, will various other digital assets be that do not (yet) have the reach and adoption of BTC and ETH. These so-called altcoins are becoming increasingly appealing for traders and investors who are looking for large returns. Altcoin indexes have gained momentum and looking forward, specifically, decentralized finance (DeFi) assets are expected to see a more important role in investors’ portfolios. These DeFi assets will perform extremely well as investors who feel they have missed out will attempt to find the next Bitcoin.

With the industry’s total market cap still only being a fraction of gold, equities, and many other assets, there is a lot of opportunity to grow. Digital assets are in a unique position to be the most important asset class of the year(s) to come. Retail speculators and institutional investors alike can find interesting positions in this trillion-dollar market.

Institutional investors continue to push digital assets to new grounds

The $1 trillion milestone strengthens cryptocurrencies as an investable asset class that no longer sits on the fringes of traditional finance as a toy for retail investors. Over the course of 2020, large corporations and investment companies already began to embrace Bitcoin into their portfolio. Mainstream entities began unveiling their Bitcoin purchases, often allocating hundreds of millions to the digital asset which elevated the perception of cryptocurrencies as a viable investment among institutional investors. BTC’s upwards movement is fueled by institutional analyses pointing to price targets such as $146k by JPMorgan and $400k by Guggenheim.

Institutional investments and big investors for Bitcoin in 2020

Source: Coindesk quarterly review 2020 Q4, 2021

The accelerating rhythm of large institutional investors publicly talking about and investing in BTC as a portfolio asset not only provided validation to its role in portfolios, it has also attracted the attention of other investors. This self-reinforcing loop is likely to continue into 2021, especially given the mounting uncertainty around currencies and inflation.

Another metric that hints at growing institutional involvement is the number of whales (=wallets that hold large balances of a digital asset) formed in the past months. The figure of wallets with over 1000 BTC is over 30% higher than at the end of 2017, the height of the last crypto bull run, indicating the growing presence of deeper pockets in the market. Another indicator that institutional investors gain increased exposure to digital assets is the growing volumes figure on the Chicago Mercantile Exchange (CME), the world’s largest derivatives exchange focused on institutional investors. The CME’s BTC futures open interest in USD grew almost 300% over Q4 2020 to become the largest in the industry, having started the quarter in fifth position.

In addition to institutional investors continuing to push the market forward we can identify a surge of retail demand as well. With the launch of PayPal’s crypto offers at the end of 2020, allowing its clients to buy, sell, and hold cryptocurrencies, and a "pay with crypto at checkout" feature for over 26 million merchants launching sometime in 2021, exposure to digital assets for retail investors is getting increasingly easy. During the last few days, PayPal already has doubled its previous cryptocurrency volume record, with $242 million worth of digital assets changing hands on the platform on January 11th. These numbers appear to show the growing popularity among retail investors, and PayPal is joining a number of FinTech brokers and wealth management platforms that have integrated digital assets or are looking to cryptocurrencies as a customer acquisition tool and revenue growth opportunity.

2021 will be a year where we see lots of investments in the digital assets space - be it from retail or institutional investors. While the most recent volatile BTC price movements could be retail-driven, as many small investors panic, take their profit, and walk away, institutional investors can likely drive prices and money in the market to never-reached heights. For these entities, “small” gains as for retail investors, do not play a big role. They are in it for the long-term, and the more regulated the market gets, the more interesting it becomes for these large asset owners to invest in digital assets.

CBDCs and stablecoins

With institutions getting more and more involved in the digital assets market, governments can no longer sit on the sidelines. Central Bank Digital Currencies (CBDCs) have been already heavily discussed, researched, and analyzed in 2020. And this year will even see a bigger focus on them. The first CBDC to launch officially was the Bahaman Sand Dollar issued by the Central Bank of Bahamas, in late October. Although there is not much clarity as to how it’s currency is used in the financial system, there are several other projects to come in 2021 - some of the most notable ones are:

1. The Digital Yuan

There exists a very high probability that the next CBDC will come from China. With several tests in various cities, the launch of the DCEP (Digital Currency Electronic Payment) will be a major milestone for the CBDC movement considering the scale in question. This might empower China to internationalize the yuan and break the US Dollar monopoly on international payments.

2. The Digital Euro

The European Union, consisting of 27 member nations, might need more time to launch its digital currency, as there would be a lot of stakeholders that need to reach a consensus. However, with all studies in progress, a decision is supposed to be made by mid-2021 whether to launch a digital euro project starting with an investigation phase.

3. The Swedish eKrona

Sweden was the first nation to really embrace the idea of a digital currency. With a low usage of cash in its population, most citizens are already used to digital methods of payment. Therefore, it is not far-fetched to assume that this country might lead Europe in terms of CBDC.

Multiple other countries like the United States, the United Kingdom, and Germany are discussing the feasibility of their own digital currencies. However, no actionable steps are taken yet, and it is to be seen whether the year 2021 will produce real initiatives from these countries.

With CBDCs on the rise, but taking longer to adopt due to political and stakeholder issues, private stablecoin initiatives might be more feasible to succeed in 2021. One of the biggest announcements was already made by the US regulators: banks and financial providers got the green light to settle transactions with stablecoins and even act as validator nodes on a public blockchain. There will undoubtedly be continued focus on stablecoins after the OCC announcement as blockchains can now be treated as infrastructure similar to SWIFT, and stablecoins could become a mainstream payment medium.

Decentralized Finance

Decentralized finance (DeFi) promises to be a game-changer for the financial sector - anyone, anywhere, at any time can access a variety of financial services. DeFi makes savings, loans, trading, insurance, and other services more accessible to citizens around the world with internet access. And DeFi’s ecosystem continues to form the foundation of the crypto economy. As an ever-evolving and developing field, DeFi has yet to uncover its full potential and will continue to push boundaries in the financial industry. Projects unveil very interesting development roadmaps, opening opportunities for new financial solutions in the market. These are not unnoticed by traditional financial institutions that will try to get a foot in the market - either by partnering with DeFi projects, collaborating on various developments, or acquiring talents. The lines between DeFi, centralized finance (CeFi), and traditional finance will become thinner and thinner. There will be growing synergies in the industry and markets will merge to complement each other.

Further, with DeFi creating a blueprint for other application sectors to evolve, other categories are expected to see an influx of developments. Non-fungible tokens have already gained interest in 2020, and are looking to build on that this year. Tokenized securities, providing fractional ownership of real-world assets, will see an increase as well. Real estate and gold are at the forefront of being tokenized and thereby more accessible to the whole population. In the future, we can expect to see an increasing number of tokenized digital assets as well as physical assets tokenized on a blockchain like bonds, video game assets, and even designer handbags.

The future is bright for the digital assets industry, with large investments and major developments in progress. While retail and especially institutional investors get ready to push the industry forward, market players are evolving and forcing large public and private entities to get involved in the crypto and blockchain space. 2021 will only show how far the industry can go, but it’s certain that there will be significant changes opening up new opportunities for everyone.


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