Perspective | Why is 2020 so important to digital currencies?

Author | Peter Johnson

Peter Johnson is the head of Jump Capital, responsible for the company's investments in fintech and crypto. Since joining Jump Capital as the first employee in 2013, he has invested in more than 50 companies, including many leading crypto companies. Jump Capital is part of the Jump Trading Group and is one of the largest proprietary trading companies in the traditional and crypto markets.

2020 is a crucial year for digital currencies.

From 2018 to 2019, it became the "cold winter of digital currency". During this period, many meaningless things were eliminated, and the market has become more mature in the past few years.

I expect that digital assets will quickly spread and be adopted in 2020, and key components of encryption will also be in place to realize the long-term potential of digital assets. This will revolutionize the way value is stored and transmitted around the world.

In this article, I will focus on 15 development directions that I think are the most influential in 2020.

Institutional investment

Global macro investors join

Ray Dalio articulates the global macro proposition of cryptography:

"One of the issues worth thinking about at the moment is deflation, coupled with huge debt maturities, huge internal and external conflicts between capitalists and socialists, which investments have good returns. When most reserve currencies When the governor of a central bank wants to devalue its currency in the fiat currency system, we can ask ourselves what the second best currency or wealth reserve will be. "

Ray's conclusion was to buy gold. If you agree with this statement, I believe that by 2020, investors in large national hedge funds (including even Ray himself) will publicly state that BTC is a logical asset.

2. Traditional asset management companies will continue to pour in

State Street's investigation report has encouraged me. The survey shows that 94% of customers have digital assets or related products, and a donation fund survey shows that 94% of customers have invested in digital assets in the past year.

I expect traditional asset management companies to continue to have a strong interest in the crypto business by 2020, but I don't expect them to invest a lot of money into the crypto industry.

The main reason is that portfolio managers' incentives are not conducive to encouraging the distribution of large amounts of digital currency. At present, digital assets are still a non-consensual investment. If portfolio managers recognize crypto investments and the return on investment is satisfactory, they may receive a decent bonus. However, if portfolio managers perform poorly in crypto investments (or they suffer losses from such operational issues as hackers while trading), they will be fired for losing client funds in the "magic internet currency."

The portfolio manager has a firm and unified position, meaning that no meaningful bets are placed on digital assets. Since then, their work has been much easier. In the end, I believe consensus will shift to digital assets to play a role in diversifying investment portfolios. But consensus will not be reached this year.

Retail investment

3. BTC derivatives trading volume increases, altcoin trading volume decreases

For retail investors who want to make a quick profit, trading altcoins was a place where they looked for volatility and potential.

Today, as altcoins fall more than 90% from their highs, active traders are increasingly turning to leveraged BTC derivatives trading. This transaction provided them with the desired volatility and the derivatives did not return to zero.

I expect the trading volume of crypto derivatives exchanges regulated by the United States (such as CME, Bakkt, etc.) to increase significantly, but the center of activity in this field will continue to come from exchanges outside the United States (such as BitMEX, etc.)

4. Statistics accumulation (and earn interest)

Although derivatives are a good thing for active traders, it is more important for those who accumulate digital currencies to have tools that allow them to easily increase their holdings.

In 2020, as more and more e-commerce and payment companies integrate crypto technology into their products, the ability to earn digital currency for retail activities will increase. In addition, encryption technology will increasingly be transferred to places where they earn interest, such as BlockFi, Celsius, and Voyager.

5. Possible automatic tax deduction

Crypto taxation is a disaster. Not only because many exchanges have issued heart-warming reports, but also because investors have missed a substantial reduction in taxes through automatic tax deductions.

Personal capital and robot consultants have made tax deduction mainstream for traditional assets, and by 2020, the mainstream will become digital currency (and better tax reporting).

market structure

6. Fewer Exchanges, More Brokers

The number of crypto exchanges has surged in the past few years. In 2020, I hope to maintain a reasonable growth figure. Exchanges are essentially companies with network effects (liquidity is used to trigger liquidity), and smaller participants will be eliminated, either acquired, closed down, or changed their business models.

I expect that companies that are good at acquiring and serving customers will become brokers and get liquidity from other exchanges or large liquidity providers.

7. Increasing use of third-party custodians

As exchanges and brokers focus on their core competitiveness, they will increasingly use third-party custodians. This will make the market safer (because assets are hosted by first-rate custodians) and ultimately increase capital efficiency. Because the assets held by mainstream custodians will provide purchasing power across multiple exchanges.

The emergence of instant crypto settlement solutions (such as the Silvergate exchange Network) of large crypto custodians will also be a major development in 2020 and will further increase the effectiveness of market participants and custodians in holding assets jointly.

8. Crypto helps expand bank size

Access to legal bank accounts and payment services has been, and will continue to be, one of the biggest issues facing crypto companies. Globally, large banks that have a negative attitude to risk will continue to avoid the crypto industry, providing new entrants and smaller participants an opportunity to fill the gap in technology-driven intermediaries or full-stack new banks.

By 2020, I expect that some new entrants will face major challenges from regulators, and those new entrants who can cope with regulatory pressure will expand rapidly.

9. Lending market growth

The crypto lending market is booming in 2019, with companies like Genesis, BlockFi and Celsius all participating.

I expect the volume of crypto lending market to continue to expand significantly in the following dimensions in 2020:

1) Traders borrow shorts in digital currencies to overcome the problem of low capital efficiency;

2) The investor borrows USD with digital currency as collateral;

3) Crypto companies become stable banks by depositing stablecoins and providing stablecoin loans.

10. Third party risk surges

By far the most significant risks for exchanges come from hacking and payment processor crashes.

This year, if we see significant downside volatility, then default risks from unsecured digital currency borrowers and risks from direct counterparties to outstanding transactions (such as Herstatt Risk) may be exposed.

These may be small-scale emergencies, not systemic ones, and will help the market mature. Because market participants will be more perceptive when choosing counterparties and using solutions to minimize these risks.

Stablecoin

11. USD stablecoin market value and trading volume will increase

Tether's extraordinary resistance to risk shows that market participants without direct service from Bank of America have an endless need to have USD-denominated accounts to settle transactions and store value. Despite significant regulatory uncertainty, I expect Tether's market value to continue to grow in 2020.

The regulated U.S. dollar stablecoin market (such as USDC, TUSD, PAX, etc.) will grow rapidly (the economic base is relatively small). Because they become the track of funds transfer, a solution that can both monitor and run on the open network (any crypto wallet can send / receive).

This will be a high-profile spot between the Silvergate Exchange Network (regulated + closed network) and Tether (unregulated + open network).

12. International stablecoin will keep growing

I expect stablecoins for many other major currencies will also be of interest. These stablecoins will be regulated and open to the flow of funds.

In the long run, as the liquidity market develops between the stability of various currencies, and provides a 7 * 24, global, everyone can enter the efficient foreign exchange market and avoid the corresponding banking system. Ultimately, I expect the market value of stablecoins to exceed BTC.

13. Central Bank Digital Currency (CBDC) will still be at the conceptual stage

Most expected central bank digital currencies differ significantly from stablecoins like USDC. In the central bank digital currency, the value records owned by individuals and businesses are centrally kept by the central bank. Only in rare cases will it be possible for the central bank / government to take over this bookkeeping function.

I don't expect any major central bank digital currencies to be launched in 2020 (except for small-scale PoCs), but I expect central bank digital currencies to make significant progress in 2021 and beyond.

Use in emerging markets

14. Emerging market digital currency usage continues to grow

In hyper-inflationary markets, the use of digital assets has grown significantly and will continue to remain. The interesting question is, will BTC or stablecoin be the main winner in these regions?

I hope that BTC will be the main winner, but my rational judgment is that it will be a stablecoin.

Defi

15. Impressive innovations rarely used

The most innovative developments in the crypto space are still on DeFi (decentralized lending, derivatives, exchanges, prediction markets, etc.), but it is unlikely that there will be breakthrough growth in this area in 2020.

At present, these solutions cannot solve the problem better than centralized solutions, and each smart contract platform has some problems. For example, the development roadmap of ETH is very complicated and difficult to be adopted.

But I am still optimistic about the long-term development of DeFi, just not this year.

Peter Johnson Author

Zoe Zhou Translation

Edited by Roy Wang