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Why 2020 will be a big year for crypto

• 2020 is going to be a big year for crypto. 

• The “Crypto Winter” of 2018/2019 flushed out much (but certainly not all) of the nonsense, and the market has significantly matured over the last few years.

In 2020, I expect accelerating crypto asset adoption, and key building blocks will come into place for crypto to achieve its long-term potential of revolutionizing how value is stored and transferred around the world. 

I think my 85 theses from ~7 months ago have aged pretty well. Here, I’ll focus on the 15 most impactful developments I expect to see in 2020.   

Institutional Investing 

• The Global Macro Investors Come In

Ray Dalio clearly laid out the global macro thesis for crypto when he said:

“So, the big question worth pondering at this time is which investments will perform well in a reflationary environment accompanied by large liabilities coming due and with significant internal conflict between capitalists and socialists, as well as external conflicts. It is also a good time to ask what will be the next-best currency or storehold of wealth to have when most reserve currency central bankers want to devalue their currencies in a fiat currency system.”

Ray’s conclusion was to buy gold. In 2020, I believe large global macro hedge fund investors (potentially even Ray) will publicly take the position that bitcoin is a logical asset to hold if you believe this narrative.

• Traditional Asset Managers Continue to Trickle In

I am very encouraged by the State Street survey indicating 94% of their clients hold digital assets or related products, and a survey of endowment funds in which 94% of them stated that they invested in crypto assets over the last year.

I expect these types of traditional asset managers to continue to show strong interest in crypto in 2020, but do not expect massive inflows from this segment. 

The primary reason for this is that portfolio manager incentives are not conducive to encouraging large crypto allocations.  Currently, crypto is still a non-consensus investment. If a portfolio manager gets behind investing in crypto, and it does well, they probably get a nice bonus (but not the types of payouts available to those investing their own money or 2/20 hedge funds); however, if it does poorly (or they lose money in an operational issue like an exchange hack), they get fired for losing client funds in “magical internet money.”

The portfolio manager who sticks with the consensus position of not taking a meaningful bet on crypto keeps their cushy job. Eventually, I believe the consensus will shift to the position that crypto has a role to play in a diversified portfolio, but not this year.  

Retail Investing 

• Bitcoin Derivatives Trading Grows, Altcoin Trading Shrinks

For active retail traders looking for quick gains, long-tail altcoin trading was once the place to find the volatility and potential they sought.

Now, with altcoins down 90%+ from highs, active traders are increasingly moving to leveraged bitcoin derivatives trading, which offers the volatility they seek, in an asset that is not on its way to zero. 

I expect volumes on U.S. regulated crypto derivatives exchanges (e.g., CME, Bakkt) to grow strongly, but the center of activity this space will continue to come from exchanges that cater to non-U.S. retail traders (BitMEX and the like).

• Stats Get Stacked (and Earn Interest)

While derivatives are great for active traders, the more important developments for those accumulating crypto are those that enable them to easily grow their holdings.

In 2020, this will happen in two ways: 1) The ability to earn crypto for retail activity will accelerate as more ecommerce and payment companies integrate this into their offerings, and 2) Crypto holdings will increasingly migrate to places where they earn interest, such as BlockFi, Celsius, and Voyager. 

• Automated Tax-Loss Harvesting Becomes Available

Crypto taxes are a disaster not only due to the horrendous reporting from many exchanges but also because investors are missing out on the ability to significantly reduce their taxes via automated tax-loss harvesting.

Personal Capital and robo-advisors made tax-loss harvesting mainstream for traditional assets, and in 2020, this will finally come to crypto (along with better tax reporting).  

Market Structure

• Fewer Exchanges, More Brokerages

The number of crypto exchanges exploded over the last few years. In 2020, I expect this to rationalize. Exchanges are inherently network effect businesses (liquidity begets liquidity), and smaller players will fall behind, and either be acquired, fold, or pivot their business models.

I expect those that excel at acquiring and servicing customers will become brokerages and source their liquidity from other exchanges or large liquidity providers.  

• Use of Third-Party Custodians Increases

Exchanges and brokerages will increasingly use third-party custodians as they focus on their core competencies. This will make the market safer (as assets are custodied with best-in-class providers) and will eventually increase capital efficiency, as assets held at major custodians will provide buying power across multiple exchanges.  

The emergence of instant crypto settlement solutions (think Silvergate Exchange Network for crypto) from large crypto custodians will also be a major development in 2020, and further increase the utility of market participants holding their assets with these custodians.

• Crypto Friendly Banks Scale 

Obtaining fiat banking accounts and payment services has been, and will continue to be, one of the biggest issues for crypto companies. Around the world, large risk adverse banks will continue to shy away from banking the crypto industry, providing an opening for new entrants and smaller players to fill the gap as technology-driven intermediaries, or full-stack de novo banks. In 2020, I expect some new entrants to run into significant issues with regulators, while those that are able to navigate regulatory pressures will scale impressively.    

• Lending Market Grows

The crypto lending/borrowing market flourished in 2019, let by companies such as Genesis, BlockFi, and Celsius.

I expect volumes will continue to significantly expand in 2020 across several vectors: 1) Traders borrowing crypto to short and overcome capital inefficiencies, 2) Investors borrowing dollars using their crypto as collateral (much more tax efficient then selling), and 3) Crypto companies becoming de facto banks by taking stablecoin deposits and making stablecoin loans. 

• Counterparty Risk Flares Up

The counterparty risks from holding assets with exchanges (e.g., hacks) and payment processors (e.g., Bitfinex / Crypto Capital debacle) have been the most notable to date.

This year, counterparty risk from defaults by uncollateralized crypto borrowers and from direct counterparties failing to deliver on trades (i.e., Herstatt Risk) could also come to light if we see significant downside volatility. 

These are likely to be smaller flare-ups vs. systematic blow-ups and will help the market mature as market participants become more discerning in selecting counterparties and using solutions to minimize these risks. 

Stablecoins

• USD Stablecoin Market Cap and Volumes Accelerate

Tether’s remarkable resilience has demonstrated insatiable demand by market participants not directly served by U.S. banks to have USD denominated accounts to settle trades and store value. Despite significant regulatory uncertainty, I expect Tether’s market cap to continue to continue to grow in 2020. 

The regulated fiat-backed USD stablecoin market (USDC, TUSD, PAX) will experience huge growth rates (off a relatively small base) as they become the money transfer rail for use cases the need a solution that 1) is regulated and 2) runs on a open network (anyone with a crypto wallet can send/receive).

This will be a compelling position that sits between the Silvergate Exchange Network (regulated + closed network) and Tether (unregulated + open network).

• International Stablecoins Grow

I expect stablecoins for many other major currencies will also start to gain traction as a regulated, open money movement rail for those currencies. 

Longer term, things get really interesting as liquid markets develop between stablecoins of various currencies and provide a 24/7, global, highly efficient FX market that is accessible to everyone (and sidesteps the correspondent banking system). Eventually, I expect the market cap of stablecoins will surpass that of bitcoin. 

• Central Bank Digital Currencies (CBDCs) Remain Mostly Conceptual

Most contemplated CBDCs are significantly different than stablecoins such as USDC. With CBDCs, the recordkeeping of the value owned by individuals and businesses is centralized with a central bank. There are only a few situations where a central bank / government is likely to take over this recordkeeping function (e.g., China).

I do not expect any major CBDCs to be launched in 2020 (other than small scale PoCs) but do expect significant developments in 2021 and beyond. 

Emerging Markets Usage

• Emerging Market Adoption Continues to Grow

The adoption of crypto assets in markets with hyperinflation has grown significantly and will continue to do so. The interesting question will be if bitcoin or stablecoins emerge as the primary winner in these regions.

My heart hopes that it’s bitcoin, but my head says it will be stablecoins. 

DeFi

• Impressive Innovation, Little Adoption

The most innovative developments in crypto continue to be in DeFi (decentralized lending, derivatives, exchange, prediction markets, etc.), but 2020 breakout growth in this area is highly unlikely.

Currently, these solutions simply do not solve problems better than centralized options, and each of the smart contract platforms have issues that will complicate adoption (with ETH it is the complexity of their development roadmap).

Bullish on DeFi long-term, but not this year.

Source: https://www.theblockcrypto.com/post/51876/why-2020-will-be-a-big-year-for-crypto

SPONSOR: ThreeD Capital Inc. (IDK:CSE) Led by legendary financier, Sheldon Inwentash, ThreeD is a Canadian-based venture capital firm that only invests in best of breed small-cap companies which are both defensible and mass scalable. More than just lip service, Inwentash has financed many of Canada’s biggest small-cap exits. Click Here For More Information.

Institutional Investment in Crypto: Top 10 Takeaways of 2019

By: Scott Army

This post is part of CoinDesk’s 2019 Year in Review, a collection of 100+ op-eds, interviews and takes on the state of blockchain and the world. Scott Army is the founder and CEO of digital asset manager Vision Hill Group. The following is a summary of the report: “An Institutional Take on the 2019/2020 Digital Asset Market”.

No. 1: There’s bitcoin, and then there’s everything else.

The industry is currently segmented into two main categories: Bitcoin and everything else. “Everything else” includes: Web3 innovation, Decentralized Finance (“DeFi”), Decentralized Autonomous Organizations, smart contract platforms, security tokens, digital identity, data privacy, gaming, enterprise blockchain or distributed ledger technology, and much more.

Non-crypto natives are seldom aware that there are multiple blockchains. Bitcoin, by virtue of it being the first blockchain network brought into the mainstream and by being the largest digital asset by market capitalization, is often the first stop for many newcomers and likely will continue to be for the foreseeable future.

No. 2: Bitcoin is perhaps market beta, for now.

In traditional equity markets, beta is defined as a measure of volatility, or unsystematic risk an individual stock possesses relative to the systematic risk of the market as a whole.  The difficulty in defining “market beta” in a space like digital assets is that there is no consensus for a market proxy like the S&P 500 or Dow Jones.  Since the space is still very early in its development, and bitcoin has dominant market share (~68 percent at the time of writing), bitcoin is often viewed as the obvious choice for beta, despite the drawbacks of defining “market beta” as a single asset with idiosyncratic tendencies.

Bitcoin’s size and its institutionalization (futures, options, custody, and clear regulatory status as a commodity), have enabled it to be an attractive first step for allocators looking to get exposure (both long and short) to the digital asset market, suggesting that bitcoin is perhaps positioned to be digital asset market beta, for now.

No. 3: Despite slow conversion, substantial progress was made on growing institutional investor interest in 2019.

Education, education, education.  Blockchain technology and digital assets represent an extraordinarily complex asset class – one that requires a non-trivial time commitment to undergo a proper learning curve. While handfuls of institutions have already started to invest in the space, a very small amount of institutional capital has actually made it in (relative to the broader institutional landscape), gauged by the size of the asset class and the public market trading volumes. This has led many to repeatedly ask: “when will the herd actually come?”

The reality is that institutional investors are still learning – slowly getting comfortable – and this process will continue to take time.  Despite educational progress through 2019, some institutions are wondering if it’s too early to be investing in this space, and whether they can potentially get involved in investing in digital assets in the future and still generate positive returns, but in ways that are de-risked relative to today.

Despite a few other challenges imposed on larger institutional allocators with respect to investing in digital assets, true believers inside these large organizations are emerging, and the processes for forming a digital asset strategy are either getting started or already underway. 

No. 4: Long simplicity, short complexity

Another trend we observed emerge this year was a shift away from complexity and toward simplicity. We saw significant growth in simple, passive, low-cost structures to capture beta. With the lowest-friction investor adoption focused on the largest liquid asset in the space – bitcoin – the proliferation of single asset vehicles has increased.  These private vehicles are a result of delayed approval of an official bitcoin ETF by the SEC.

In addition to the Grayscale Bitcoin Trust, other bitcoin-focused products this year include the launch of Bakkt, the launch of Galaxy Digital’s two new bitcoin funds, Fidelity’s bitcoin product rollout, TD Ameritrade’s bitcoin trading service on Nasdaq via its brokerage platform, 3iQ’s recent favorable ruling for a bitcoin fund and Stone Ridge Asset Management’s recent SEC approval for its NYDIG Bitcoin Strategy Fund, based on cash-settled bitcoin futures. 

We also observed a growing institutional appetite for simpler hedge fund and venture fund structures. For the last several years, many fundamental-focused crypto-native hedge funds operated hybrid structures with the use of side-pockets that enabled a barbell strategy approach to investing in both the public and private digital asset markets.  These hedge funds tend to have longer lock-up periods – typically two or three years – and low liquidity. While this may be attractive from an opportunistic perspective, the reality is it’s quite complicated from an institutional perspective for reporting purposes. 

No. 5: Active management’s been challenged, but differentiated sources of alpha are emerging.

For the year-to-date period ended Q3 2019, active managers were collectively up 30 percent on an absolute return basis according to our tracking of approximately 50 institutional-quality funds, compared to bitcoin being up 122 percent over the same time period. 

Bitcoin’s performance this year, particularly in Q2 2019, has made it clear that its parabolic ascents challenge the ability of active managers to outperform bitcoin during the windows they occur. Active managers generally need to justify the fees they charge investors by outperforming their benchmark(s), which are often beta proxies, yet at the same time they need to avoid imprudent risk behavior that can potentially have swift and sizable negative effects on their portfolios. 

Interestingly, active management performance from the beginning of 2018 consistently outperformed passively holding bitcoin (with the exception of “opportunistic” managers who also take advantage of yield and staking opportunities, as of May 2019). This is largely due to various risk management techniques used to mitigate the negative performance drawdowns experienced throughout the extended market sell-off in 2018.

Source: Vision Hill Group

Although 2019 has challenged the large-scale success of these alpha strategies, they are nonetheless in the process of proving themselves out through various market cycles, and we expect this to be a growing theme in 2020.

No. 6: Token value accrual: Transitioning from subjective to objective

At the end of Q3 2019, according to dapp.com, there were 1,721 decentralized applications built on top of ethereum, with 604 of them actively used – more than any other blockchain. Ethereum also had 1.8 million total unique users, with just under 400,000 of them active – also more than any other blockchain. Yet, despite all this growing network activity, the value of ETH has remained largely flat throughout most of 2019 and is on track to end the year down approximately 10 percent at the time of writing (by comparison, BTC has nearly doubled in value over the same period). This begs the question: is ETH adequately capturing the economic value of the ethereum network’s activity, and DeFi in particular?

A new fundamental metric was introduced earlier this year by Chris Burniske – the Network Value to Token Value (“NVTV”) ratio – to ascertain whether the value of all assets anchored into a platform can be greater than the value of the base platform’s asset.

The ETH NVTV ratio has steadily declined throughout the last few years. There are likely to be several reasons for this, but I think one theory summarizes it best: most applications and tokens built and issued atop ethereum may be parasitic. ETH token holders are paying for the security of all these applications and tokens, via the inflation rate that is currently given to the miners – dilution for ETH holders, but not for holders of ethereum-based tokens.

This is not a bullish or bearish statement on ETH; rather it is an observation of early signs of network stack value capture in the space.

No. 7: Money or not, software-powered collateral economies are here

Another trend we observed this year is a larger migration away from “cryptocurrencies” in an ideological currency (e.g., money/payment and a means of exchange) sense, and toward digital assets for financial applications and economic utility.  A form of economic utility that took the stage this year is the notion of software-powered collateral economies. People generally want to hold assets with disinflationary or deflationary supply curves, because part of their promise is that they should store value well.  Smart contracts enable us to program the characteristics of any asset, thus it is not irrational to assume that it’s only a matter of time until traditional collateral assets get digitized and put to economic use on blockchain networks. 

The benefit of digital collateral is that it can be liquid and economically productive in its nature while at the same time serving its primary purpose (to collateralize another asset), yet without possessing the risks of traditional rehypothecation. If assets can be allocated for multiple purposes simultaneously, with the risks appropriately managed, we should see more liquidity, lower cost of borrowing, and more effective allocation of capital in ways the traditional world may not be able to compete with. 

No. 8: Network lifecycles: An established supply side meets a quiet but emerging demand side.

Supply side services in digital asset networks are services provided by a third party to a decentralized network in exchange for compensation allocated by that network. Examples include mining, staking, validation, bonding, curation, node operation and more, done to help bootstrap and grow these networks. Incentivizing the supply side is important in digital assets to facilitate their growth early in their lifecycles, from initial fundraising and distribution through the bootstrapping phase to eventual mainnet launches.

While there has been significant growth of this supply side of the equation in 2019 from funds, companies, and developers, the open question is how and when demand for these services will pick up. Our view is that as developer infrastructure continues to mature and activity begins to move “up the stack” toward the application layer, more obvious manifestations of product-market fit are likely to emerge with cleaner and simpler interfaces that will attract high volumes of users in the process. In essence, it is important to build the necessary infrastructure first (the supply side) to enable buy-in from the end users of those services (the demand side).

No. 9:  We are in the late innings of the smart contract wars.

While ethereum leads the space on adoption and moves closer to executing on its scalability initiatives, dozens of smart contract competitors fundraised in the market throughout 2018 and 2019 in an attempt to dethrone ethereum.   A handful have formally launched their chains and operate in mainnet as of the end of 2019, while many others remain in testnet or have stalled in development.

What’s been particularly interesting to observe is the accelerative pace of innovation – not just technologically, but economically (incentive mechanisms) and socially (community building) as well.  We expect many more smart contract competitors operating privately as of Q4 2019 to launch their mainnets in 2020. Thus, given the incoming magnitude of publicly observable experimentations throughout 2020, if a smart contract platform does not launch in 2020, it is likely to become disadvantageously positioned relative to the rest of the landscape as it relates to capturing substantial developer mindshare and future users and creating defensible network effects.

No. 10: Product-market fit is coming, if not already here

We don’t think human and financial capital would have continued pouring into the digital asset space in such great magnitude over the last several years if there wasn’t a focus on solving at least one very clear problem. The questionable sustainability of modern monetary theory is one of them, and Ray Dalio of Bridgerwater Associates has been quite vocal about it. Big Tech centralization is another. There are also growing global concerns related to data privacy and identity. And let’s not forget cybersecurity. The list goes on. We are at the tip of the iceberg as it relates to the products and applications blockchain technology enables, and mainstream users will come with growing manifestations of product-market fit. As more time and attention gets spent on diagnosing problems and working on solutions, the industry will begin to achieve its full potential. Facebook’s Libra and Twitter’s Bluesky initiative confirm that as an industry we are heading in the right direction.  

A 2020 look ahead

We see 2020 shaping up to be one of the brightest years on record for the digital asset industry. To be clear, this is not a price forecast; if we exclusively measured the health of the industry from a fundamental progress perspective, by various accounts and measures we should have been in a raging bull market for the last two years, and that has not been the case. Rather, we expect 2020 to be a year of accelerated industry maturation.

Source: Vision Hill Group

Digital assets are still an emerging asset class with many quickly evolving narratives, trends, and investment strategies.  It is important to note, that not all strategies are suitable for all investors. The size of allocations to each category will and should vary depending on the specific allocator’s type, risk tolerance, return expectations, liquidity needs, time horizon and other factors. What is encouraging is that as the asset class continues to grow and mature, the opacity slowly dissipates and clearly defined frameworks for evaluation will continue to emerge. This will hopefully lead to more informed investment decisions across the space. The future is bright for 2020 and beyond.

Source: https://www.coindesk.com/institutional-investment-in-crypto-top-10-takeaways-of-2019