What to expect from crypto in 2021

Milo Larkin, consultant at MRM, looks ahead to what to expect from the crypto sector in 2021 in the second part of our crypto in 2020/21 series

It has been a momentous year for the crypto sector.

Like traditional investment markets, the crypto scene has witnessed market-moving developments on an almost monthly basis, quickfire bull and bear markets, and some potentially huge steps towards wider adoption. 

We’ve already covered the two biggest themes of 2020. Here’s what to expect from crypto in 2021.

Bitcoin predictions

The most bullish analysts have predicted an explosion in bitcoin’s price. When I say they’re bullish, I mean they would give Barcelona’s best matador a run for their money.

The Stock-to-Flow model, which treats bitcoin as a store of value similar to commodities such as gold, silver and platinum, currently forecasts bitcoin to hit $89,000 by the end of 2021. The Net Unrealized Profit/Loss metric from on-chain analytics firm Glassnode indicates bitcoin could go as high as $590,000.

Olympic rowers-turned bitcoin investors the Winklevoss twins believe bitcoin could surpass gold as a store of value and hit $500,000 in the next 10 years. Elsewhere, a senior analyst at Citibank wrote in a report for his institutional clients that bitcoin could hit $318,000 by next December.

Taking a more measured approach, a JP Morgan analyst believes the value of bitcoin could double or triple if it keeps its current momentum

Suddenly $89,000 doesn’t seem such a stretch.

Institutional movement

One of the key developments in 2020 was the initiation of interest and subsequent purchase of bitcoin by large scale institutional investors.

A report in September by cryptoasset insurance firm Evertas found that 26% of institutional investors, including pension funds, are looking to increase their investments in cryptoassets by 2025.

Large investors such as investment trust Grayscale, Twitter founder Jack Dorsey’s Square, and business intelligence firm MicroStrategy have all been buying up sizable amounts of bitcoin as well.

This trend is only going to continue, with pension funds in increasing funding deficits and a host of asset classes not producing the types of returns they are seeking. There is a massive opportunity for the crypto sector here – it just needs to reach out and take it.

Turning point for ETH

Crypto isn’t only bitcoin, and like 2020, there will be significant events that don’t focus on the buying and selling of the digital currency. Ethereum faces a huge year ahead.

Despite some initial stumbling blocks in 2020, Ethereum’s continued move towards a proof of stake protocol will be an ongoing theme throughout the year.

This transition means that anyone, whether they be an individual, developer, or public entity, can ‘stake’ a set amount of Ethereum and receive a financial reward for taking part in the Ethereum ecosystem.

Since Ethereum is locked away and inaccessible, and investors receive interest payments as a result, similarities could be drawn with certain investment products, such as bonds. In an environment where interest rates are going to be ‘low-for-long’ (UK 10Y gilts currently yield only 0.328% at the time of writing), perhaps staking in crypto could emerge as a new type of investment product.

Despite the popularity of Ethereum within the crypto community and the huge boom we saw in the summer in decentralised finance (DeFi), the original purpose of the platform has yet to take off.

Perhaps the upgrades and improved scalability could finally see more widespread adoption of decentralised apps (dapps) and smart contracts. 

BofE and ECB look at a CBDC

Clearly there are upgrades and price movements happening aplenty, but what could happen in 2021 that could prove inescapable even for the most serious of crypto sceptics?

The answer: Central Bank Digital Currencies.

Central Bank Digital Currencies – or CBDCs – are the proposed successor to regular ‘fiat’ currencies, and the Bank of England (BofE) and the European Central Bank (ECB) have already indicated that they are seriously exploring the concept.

Christine Lagarde notes that, in the digital world we live in, the ECB should be prepared to launch a digital Euro.

Andrew Bailey also recognises both the benefits and drawbacks of a CBDC and is currently working through feedback from a consultation earlier this year.

Much more to come in 2021

With a sector as large as crypto, and a word count to stick to [“thanks” – the editor] we can’t deep dive into every theme for 2021.

We didn’t discuss whether the DeFi boom will continue, how stablecoins could overtake currencies, if tokenisation will help provide liquidity to illiquid assets such as property, or how Ripple and XRP’s offer of on-demand liquidity could change how financial institutions interact with each other.

But these are all important trends to keep in mind too.

Suffice to say, crypto is here to stay and will continue to impact the way consumers, societies and businesses use money. Whether that be how people bank, how they pay for goods and services, or how they construct their investment portfolios.

The views expressed in this article are for general information purposes only and should not be construed as financial advice.