2021 Crypto Predictions

VeradiVerdict - Issue #117

This issue of VeradiVerdict will be the last one of the year and what a year it has been! I thought that this would be a year full of travel but the pandemic has changed our lives, how we do business, how we do deals, and how we interact with others. While it’s been a year of change, it has also accelerated the adoption of cryptocurrencies from both institutional and retails investors. In addition to the theme of asset diversification/store of value with many more platforms to gain access, we’ve seen quite a bit of progress on scalability and applications, especially decentralized finance.

Inspired by an annual exercise that I got from Fred Wilson of Union Square Ventures, I reflected on my predictions for 2020 and create new ones for 2021. It’s always fun to see how past thoughts have fared while digging deep to figure out areas of interest for the future. I recently published my 2021 predictions on Coindesk but figured I’d resend here with some updates, especially now that the price of Bitcoin has reached another all-time high of $28,200 at the time of this writing!

Again, I am wishing everyone a safe and happy holidays and new year, and I believe that 2021 will be a monumental year for the blockchain/crypto industry, the best yet!

2020 has been an exciting year for the crypto space, including immense growth in the value of bitcoin and decentralized finance (DeFi), major moves towards central bank digital currencies (CBDCs), and better tech that makes building decentralized apps (dapps) easier than ever. Here are seven areas where I see the space going in 2021!

  • Bitcoin: Bitcoin shot up from roughly $7,000 in January to nearly $30,000 by the end of 2020 and is only seeing more interest from everyday users and institutional investors. BTC’s value will continue to skyrocket in the next year.

  • CBDCs: We saw key developments in CBDC research this year, including a significant pilot in China and in-depth research from several European banks and the Federal Reserve. I hope to see even more CBDC pilots in 2021, and possibly even full roll-outs in China or Japan.

  • DeFi: 2020 was undoubtedly the year of DeFi; in a matter of hours, dozens of protocols this year were able to capitalize by hundreds of millions of dollars. People are catching onto the immense returns from liquidity mining and DeFi, and it’s likely we’ll see several more massive projects in 2021.

  • Adoption: Crypto is becoming more financially lucrative, is being used in more and more retail applications and is catching the public eye with large scale projects like CBDCs and Facebook’s diem (formerly Libra). Given these several factors, it’s likely that 2021 will be pivotal mainstream crypto adoption.

  • Regulation: As crypto functionality expands into more retail and everyday use cases, I expect to see more regulatory guidance from key agencies about crypto as an everyday store of value. For the first time this year, the Internal Revenue Service asked taxpayers about their financial history with virtual currencies. With the launch of more CBDCs and stablecoins, governments will pay closer attention in 2021 to how cryptocurrencies are being used and how they ought to be regulated. 

  • M&A: Crypto mergers and acquisitions grew this year from an average deal size of $19.2 million in 2019 to $45.9 million in 2020, according to Pantera’s research. More and more crypto companies are reaching unicorn status, and Coinbase will have an initial public offering (IPO) next year. There will be more companies exploring SPACs as a way to go public also. As more projects pop up in the space, corporate development and M&A will become a greater trend in crypto in 2021

  • Digitized Private Assets: As financial institutions grow their interest in crypto, they are beginning to catch onto how blockchain technologies and cryptography can better support the existing economy. Traditional securities bookkeeping is incredibly inefficient and secure and can be significantly enhanced with cryptographic signatures and automation. I look forward to seeing how institutions will explore the potential of asset digitization in 2021.

It has been an eventful year, to say the least. In terms of blockchain and crypto, we saw several key developments: the halving of Bitcoin, liquidity mining and the explosive growth of several decentralized finance (DeFi) applications, stronger tools for blockchain interoperability and much more. 

As 2021 begins and the globe slowly eases its way out of the COVID-19 pandemic and associated market fluctuations, I look forward to seeing even more growth in the innovation, widespread use and diverse impacts of blockchain technologies. The space is becoming simultaneously more complex and more accessible, broadening the horizons for what the crypto community can achieve in building decentralized, user-first financial systems.

On last year’s predictions

Here is a review of my predictions from last year. Along with a summary of how that space or trend fared in 2020, I’ve included an accuracy rating to assess how well the prediction held up, with one being least accurate and five being most accurate.

Diem (formerly Libra)/Novi (formerly Calibra): Given Diem’s eventful (in the regulatory sense) public reveal in 2019, I expected 2020 to be an equally exciting year for Facebook’s project in terms of developing a reputation, fighting key regulatory battles and beginning to build up adoption. On the contrary, Diem’s launch was delayed and it stayed predominantly under the public radar throughout 2020. 

In April, the association announced that it would make key modifications to its architecture to address some of the main regulatory concerns brought against it. The governing association also renamed the project from Libra to Diem, and the wallet was renamed from Calibra to Novi. Most recently, key individuals in the initiative claimed that the platform could launch as early as January 2021. Even if Diem didn’t catch the public eye as much in 2020, they definitely made some key developments behind-the-scenes. Additionally, with the groundbreaking federal antitrust lawsuit against Facebook, Instagram and WhatsApp, the project is likely to get significantly more attention in the months ahead.

Accuracy: 3

Halving: Bitcoin’s halving from a block reward of 12.5 BTC to 6.25 BTC in May of this year certainly garnered a lot of widespread attention, but the exact effect of the halving event on the price of bitcoin is still ambiguous. There was a muted reaction to the halving event: a few days after, the price even dropped a little. Some experts proposed the halving had been “priced in” in the months leading up to it. In other words, because investors expected bitcoin’s price to appreciate the price naturally inflated before the halving event, making the exact change following the event less noticeable. 

Even if not immediate, the halving certainly had a major effect on the long-term outlook for bitcoin and the macro narrative that has since dominated the dialogue with traditional investors on bitcoin’s potential.

Accuracy: 4

Gaming: Unfortunately, in 2020, we didn’t see that many new developments in the blockchain space for gaming, and certainly not many public facing launches. Many game developers still face a great deal of technical friction in terms of building on chain, due to its complexity and often slow runtime. Still, the interest in the concept has not subsided. Many game creators are exploring how non-fungible tokens (NFTs) can be used as valuable digital assets in games. 

Several studios, including Pixelmatic, Ubisoft and Atari have all claimed that blockchain technologies could play important roles in their games in the future, and are beginning to actively explore the concept. As of today, one of the most promising and well-known blockchain games is “The Sandbox,” a game kind of like Minecraft where users can monetize digital assets via the blockchain. The Sandbox has already announced partnerships with major game developers like Atari and Square Enix.

Accuracy: 2

DeFi growth: If nothing else, 2020 was the year of DeFi. One of the biggest trends of the year, undoubtedly, was liquidity mining. To keep it simple, liquidity mining is essentially where users supply their own assets as liquidity to a protocol in exchange for a protocol’s governance token. Over time, due to lots of interest, this governance token increases in value, often generating immense returns for the liquidity-supplying user and incentivizing them to keep supporting the DeFi protocol. This year governance tokens for Compound, Balancer, Yearn.Finance and many more launched and exploded in value. Further, the value generated for these platforms’ liquidity suppliers was around 100-200% APR. 

In January, a grand total of $1 billion was locked into DeFi platforms collectively. In August, it peaked at $15 billion USD. Interestingly, MakerDAO continues to be the platform with the most value locked in, though that first-place position was usurped several times over the year by Compound and other platforms. Users are beginning to reap the benefits of a decentralized, community-owned financial system. We’ll likely see this excitement and rapid growth continue through 2021.

Accuracy: 5

Central bank currencies: The COVID-19 pandemic had, and is continuing to have, a massive economic impact on several of the world’s largest economies. It’s also raised some serious doubt about the government’s competence and intentions in its economic policy and highlighted some key concerns and difficulties with the efficiency of our existing economic system. While we may have not seen any significant launches in central bank currencies in 2020, the space definitely saw a lot more interest as more governments, banks and research institutions explore how crypto can enhance our financial system. 

China’s central bank is working on a digital currency pilot, which has seen over 4 million transactions and 2 billion yuan in gross volume. In October, several financial institutions including the Bank of Canada, the Bank of England, the European Central Bank and the U.S. Federal Reserve collectively published a report outlining the key features necessary in a successful, feasible CBDC. The Federal Reserve also has been actively working towards the development of a digital dollar.

Accuracy: 4

Infrastructure & Web 3.0:2020 saw the launches and announcements of several key infrastructural projects within the blockchain space that will enable a great diversity of decentralized applications in the future. One of the year’s largest was the public launch of the Alchemy API, which positions itself as the AWS of blockchain. It’s building infrastructure that makes it simple to manage and build on top of Ethereum nodes and currently powering $7.5 billion in on-chain transactions annually. 

Other Web 3.0 infrastructure tools include the Keep protocol, which provides developers with off-chain storage for dapps; API3, which works with the API ecosystem to build blockchain-native oracles and bring the massive returns of DeFi and dapps to API providers; and the Oasis Protocol, which builds blockchain-enabled tools to help developers securely analyze data and guarantee user privacy. Given the generally growing interest in decentralized applications overall, I hope to see more developers take advantage of these technologies to reduce the complexity of building dapps and expanding their use cases. 

Accuracy: 4

Regulatory hurdles: In general, throughout 2020, we saw less public attention and debate on regulating crypto, likely because government financial institutions were likely focused on other areas (rightly so), due to the implications of the pandemic. However, several government agencies made key regulatory actions throughout 2020 that demonstrate how they are thinking more seriously about cryptocurrency and the role it plays in the modern American economy.

In 2020, the SEC charged crypto firms roughly $40 million in penalties, while the CFTC charged crypto firms roughly $9 million in penalties, an all-time high for the latter. Most of these sanctions and penalties are targeted around initial coin offerings (ICOs) and gray areas around whether certain tokens should be deemed securities or commodities. Some of the most prominent developments from this year include the SEC’s proposed safe harbor for crypto entrepreneurs, the CFTC’s case against Abra, for selling security-based swaps to investors without listing them on a recognized national exchange, and the CFTC’s case against BitMex, for offering illicit crypto services to their users. 

Accuracy: 3

Looking Ahead

Here are seven areas where I expect to see lots of promising innovation and growth throughout 2021.

Bitcoin will continue to grow immensely in value and popularity, as the original flagship cryptocurrency. Bitcoin started the year hovering at a price of $7,000 and climbed to fresh all-time highs above $28,000. Payment giants like PayPal and Square are making it easy for everyday users to purchase bitcoin, and institutional investors are showing more interest than ever. Following a 90% growth in price in 2019, and a whopping 170% growth in price in 2020, I look forward to seeing bitcoin grow in value even more and become more widely-used. 

Governments will be exploring central bank digital currencies (CBDCs) more seriously, and we may see a launch in 2021. As mentioned above, several governments and cross-governmental agencies demonstrated a serious commitment to exploring how CBDCs can better support economies, via pilots and in-depth case studies. With the impending Diem launch and other projects like Celo rolling out more products and functionalities, it’s likely that stablecoins will generally gain more traction as a viable vehicle for money transfer, spurring even more governmental interest. 

China’s pilot with the digital renminbi (DC/EP) has gone exceedingly well, and availability is targeted to expand next year, maybe even faster than we expect. In Japan, 30 banks are already investigating a digital currency offering, and the country may even see a full public roll out in 2021 itself. The Bank of England also continues to investigate applications for CBDC in retail, and could begin pilots next year as well. 

DeFi will continue to explode in value. In 2020, we saw a ridiculous 15-fold increase in the value locked in DeFi protocols. Much of this growth was driven by the trend of liquidity mining, kickstarted by some key players like Compound and Balancer, where protocols incentivized users to supply liquidity in exchange for governance tokens that appreciated quickly over time. 

The community also saw a trend of developers forking existing protocols and platforms to build ones for more custom use cases or enhanced decentralization and privacy. Some key ones include Cream Finance, which is a fork of Compound and Swerve Finance, which is a fork of Curve. It’s more lucrative (and easier) than ever to set up a DeFi protocol, and I look forward to seeing more projects in this space and another whopping increase in the total value locked across all platforms. The incredible capitalization of these existing platforms could also set them up to support more unique functionalities, including larger loans, differentiated lending products and more. 

Crypto will begin to see widespread mainstream adoption. Even the harshest critics of cryptocurrency and digital currency are beginning to see the immense value that can be generated by these technologies. The explosive growth on DeFi protocols itself is too strong of an argument to reject. In Latin America and Southeast Asia, more and more people are using cryptocurrency to settle regular, everyday financial transactions. Additionally, as the community comes up with better primitives, tools and abstractions for building dapps, developers will be able to position these tools in more appealing ways to everyday consumers. Given the convergence of all these factors, 2021 could be the pivotal year for driving mainstream crypto adoption. 

With widespread mainstream adoption, we’ll begin to see some more regulatory clarity, especially in retail use cases. As crypto becomes more mainstream, it becomes a more important issue for regulatory agencies to focus on. The vast majority of crypto regulation thus far has been centered around distinguishing securities from commodities and ensuring that tokens follow appropriate guidelines per SEC and CFTC rules. Not as much work has been done on crypto as an everyday store of value, and how stablecoins and other digital currencies can be used for retail, compensation and more. 

Governments are interested in how crypto transactions would affect taxes, especially demonstrated by the IRS’s inquiry into digital financial activities. Above all else, the growing interest in using cryptocurrency, not exclusively as a means for trading, lending or investing, but as a literal replacement to cash and credit in our everyday financial activities will necessitate much more regulatory work from key agencies in 2021. 

2021 will see several crypto acquisitions, unicorns, an IPO, and more SPACs. Coinbase looks set to go public in 2021. Along with Coinbase, several other prominent crypto companies have reached Unicorn status, including Circle, Binance and Ripple. Companies that reached at least a few hundred million in value will explore going public through SPACs. Additionally, crypto M&A continues to grow, with the average deal value of 2020 being $45.9 million, more than double of 2019’s average value of $19.2 million. 

As more people become interested in the space and more crypto projects spin up, it’s only natural that we’ll see a sharp hike in the amount of crypto business development, via more acquisitions, and more projects reaching unicorn status. Especially given the massive inflow of institutional capital as the world’s leading financial institutions become more curious about crypto, M&A and business development will play an even larger role in the 2021 crypto entrepreneurship scene.

Private assets will slowly start to go digital. Beyond the pure financial value that can be generated by decentralization and cryptocurrency, large financial institutions are also beginning to see significant potential in the underlying blockchain technologies and some key ways they could support existing financial systems. Traditional securities bookkeeping has a poor record of ownership, significant manual oversight for compliance and long/slow trading workflows. Digitizing bookkeeping using blockchain and cryptography could make things significantly cheaper and more secure.

Using cryptographically verifiable keys can provide a more trusted record of ownership, and digitization also naturally leads to faster workflows and more automations. Such a change is likely to be slow, because it challenges a longstanding paradigm within the financial industry, but it definitely generates a significant amount of value for the space and banks are beginning to keep their eye on it. 

Final Thoughts

2020 may have been the blackest of black swans, and still, the crypto space saw some incredible developments, innovations and growth. As 2021 begins and the world begins its return to “normal,” the incumbent changes over the next few months will certainly have an effect on crypto interest and usage, both from blockchain developers and everyday users. Despite the inevitable challenges, however, I’m extremely excited for the space in 2021. 

We’re reaching some significant inflection points in areas from retail adoption, to nationalized digital currencies, to faster blockchain technologies and these developments will hopefully power a brighter, more accessible and even more decentralized financial future in the years to come. 

- Paul V

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ABOUT ME

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-auction ICOs, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.