Cryptocurrencies in 2021: are digital currencies about to reach the inflection point into mainstream finance?

by Jonathan Adams

Three years after the mania of 2017, when the original cryptocurrency recorded a thirteen-fold rise in value to a peak of $19,300, Bitcoin is back. And with it, the cryptocurrencies sector more generally. After 2017’s dramatic bull market/bubble, Bitcoin’s value had tumbled back to around $3000 by the middle of the following year.

Regulators and policymakers were adamant they would red-tape cryptocurrencies out of viability if it looked like they would become something more than a niche payments mechanism. The hostility from the establishment stemmed from the greater anonymity afforded by cryptocurrencies meaning they quickly become tarred as facilitating illegal transaction and money laundering. Large numbers of cryptocurrency-related scams, particularly connected to ICOs (initial coin offerings) didn’t help.

For the past couple of years Bitcoin has been quietly holding its value at between $5000 and $10,000. It largely dropped off the mainstream media’s radar, other than the occasional reminder, such as when Facebook announced it planned to launch its own cryptocurrency – Libra. That also draw warnings from policymakers, with Facebook cautioned to toe-the-line or face ramifications.

But in 2020, amidst the Covid-19 maelstrom, Bitcoin’s value has exploded again. From August, the core cryptocurrency began to steadily gain in value. That climb started to accelerate from late September and by a couple of weeks ago, almost unheralded, Bitcoin was suddenly at new record highs again, having passed the $20,000 barrier.

bitcoin chart

Into the last couple of days of 2020 and a single Bitcoin trades at almost $27,500. That’s left many to question if Bitcoin is now ready to genuinely force itself into the mainstream financial markets landscape? Could 2021 be the year cryptocurrencies genuinely establish themselves in the real world?

Why 2020/21 could be different to Bitcoin’s 2017 bubble

Back in 2017, Bitcoin and the wider cryptocurrencies sector, attracted a lot of scepticism from the mainstream financial services sector, and its regulators. But despite that, and the subsequent bursting of the Bitcoin bubble, something important did change. Financiers who did dig into cryptocurrencies and tried to understand both the technology and how the model might fit with existing fiat currencies and asset classes, genuinely saw potential.

Enough people inside finance reached the conclusion that, managed and regulated correctly, cryptocurrencies could really become a new asset class. There was an acceptance the Bitcoin was more than just a modern version of a speculative bubble, like Dutch tulips back in the 17th Century.

The fact Bitcoin is finite, no more than 21 million can ever be in existence, gives the cryptocurrency the potential to become a genuine store of value – like digital gold. But with more potential uses than the precious metal.

What’s driven the new 2020 demand for Bitcoin?

The difference between 2017 and 2020 is that this time around the evidence suggests the growing demand for Bitcoin is being driven more by mainstream investors than the armchair speculators and grey market participants of three years earlier.

Back in 2017, JP Morgan chief executive Jamie Dimon threatened to fire any employee trading Bitcoin, even in a private capacity, for being “stupid”. He called cryptocurrencies a “fraud” and “worse than tulip bulbs”.

Three years later and JP Morgan provides banking services to Coinbase and Gemini, two of the biggest cryptocurrency exchanges. This month the investment bank told investors it saw a risk of gold prices suffering due to investors switching to Bitcoin.

Other financial institutions are getting onboard. In the past few weeks, Standard Chartered and Northern Trust said they would begin to offer “institutional grade” cryptocurrency custody services. That means they will hold and insure Bitcoin for institutional investors in a similar way to how they would do so for an investment portfolio or gold bars.

Established banks offering cryptocurrency-related services are simply responding to client demand, rather than championing digital alternatives to fiat currencies or gold. They’ve seen the shift in attitudes exemplified by the fact some of the best-known hedge funds and managers in the world have started to invest in Bitcoin. Among them are Stanley Druckenmiller, who made a fortune betting against the pound alongside George Soros in 1992. Paul Tudor Jones is allocating between 1% and 2% of total portfolio assets to Bitcoin. The world’s second largest hedge fund, Renaissance Technologies, is trading Bitcoin futures and U.S. business intelligence company Microstrategy has $500 million of Bitcoin listed on its balance sheet as an asset.

In the UK, the firm Ruffer, behind the Ruffer investment trust listed on the London Stock Exchange and invested in a range of assets, has allocated 2.7 per cent of the fund to Bitcoin. The bet involved a £550 million investment in the cryptocurrency.

These are all developments that have taken place in 2020 and the Covid-19 pandemic has been an influence. The first, less tangible, reason is the acceleration of the general trend towards a more digital economy the pandemic has resulted in. The second reason has been the more influential – Bitcoin’s finite nature, which stands in direct contrast to the trillions of dollars, euro, yen and pounds printed by central banks in a matter of months this year. The Bank of England has printed pound sterling worth a fifth of GDP.

Institutional investors are growing concerned about the extent of the debasement of fiat currencies that level of money printing is bringing about. Bitcoin is increasingly seen as a hedge against that.

Can cryptocurrencies be much more than just a digital alternative to gold?

Cryptocurrency supports also believe the potential of Bitcoin and other digital currencies is much more than simply as a store of value akin to digital gold. They see digital currencies as technology whose true potential has still to be untapped. Like early cars before modern networks of roads and petrol stations were built.

What’s still missing for cryptocurrencies to become genuinely mainstream is a formal exchange that is able to provide deep liquidity, transparency and trust. When Microstrategy was buying up Bitcoin, its boss complained market data and infrastructure was “garbage”, limiting it to transactions worth $30 million-a-day.

For cryptocurrencies to enter the genuine mainstream as an asset class, there is a need for an institutional market that provides price origination, discovery and trading. Right now, prices can vary with some significance from crypto exchange to exchange as there is nothing like the role cable performs in setting the dollar-sterling price.

That may be coming this year. Campbell Adams, a former forex trader who in 2013 developed an exchange to block speed traders is expected to launch the first mainstream crypto exchange platform in 2021. Its being done in partnership with two major investment banks, who will offer custody services, primer brokerage and leverage.

All standard banking regulations such as “know your customer” and anti-money laundering measures will be in place. That will make the over-the-counter exchange far more transparent than anything currently on the market. Which will be a big step towards enticing more institutional investors into the mix.

The cryptocurrencies market still has a wild west feel to it but to a much lesser extent than it did in 2017. The quiet evolution going on in the background has been significant and 2021 could genuinely be a breakthrough year.

Facebook’s Libra is due for launch early in 2021, possibly before the end of January. The social media company has scaled its ambitions for the digital currency back, under pressure from regulators. Other developments include China trialling digital money printing by creating cash and putting it directly into the ‘e-wallets’ of Chinese households.

In the UK, the Bank of England is developing its own digital currency and chancellor Rishi Sunak has said his ambition is for the UK to be “leading the global conversation on new technologies like stablecoins and central bank digital currencies”.

It all points to a further acceleration of mainstreaming in 2021. It’s still very difficult to predict exactly how the digital currency landscape will look 10 years from now. And if Bitcoin will even be a major part of it at that point. But that cryptocurrencies will be around in a decade, and part of the mainstream financial landscape, is looking increasingly likely. And 2021 could well prove to be a pivotal year in that process.

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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