Bitcoin on stairs

2020 was quite a year for the crypto space and featured several key themes, most importantly rising institutional interest. This was driven in part by the COVID-19 pandemic, which led to rampant money printing from central banks around the world.

Institutions picked up on Bitcoin’s unique properties as a store of value and realized it could also be a strong inflation hedge, starting with legendary hedge fund manager Paul Tudor Jones, who announced in May 2020 that he had just over 1% of his assets in bitcoin. Many believe Paul Tudor Jones’ statement that he was investing in bitcoin removed some of the stigma of investing in bitcoin and cryptocurrencies for institutional investors.

Further institutional acceptance of Bitcoin came in November when billionaire investor Stanley Druckenmiller said he held a position in bitcoin. By late December, headlines that institutional investors were looking into or investing in bitcoin seemed almost commonplace, with news such as Guggenheim filing to invest as much as 10% of its $5.3 billion Macro Opportunities Fund into GBTC and insurer MassMutual purchasing $100 million of bitcoin for its general investment account. Another notable headline was that British fund manager Ruffer Investment Management held approximately $745 million of bitcoin as of mid-December.

A key development in 2020 also concerned corporate interest in Bitcoin. MicroStrategy, a publicly traded business intelligence company, made a splash when it purchased $250 million of bitcoin in August, stating that it considered bitcoin as a treasury reserve asset. Its CEO, Michael Saylor, has emerged as a Bitcoin advocate and is encouraging other companies to invest a portion of their balance sheets into bitcoin. By late December 2020, MicroStrategy announced it had purchased over $1 billion of bitcoin in 2020. In addition to MicroStrategy, Square was another public company that acquired some bitcoin, investing $50 million, or 1% of its assets, into bitcoin in October. On the commercial side, several notable companies said they were launching crypto products. The most notable one was PayPal, which announced in October that it was rolling out the ability for PayPal users to buy, sell, and hold certain cryptocurrency and to pay merchants in crypto. In December, both S&P and CBOE said they plan to launch cryptocurrency indices in 2021, underscoring greater institutional demand for crypto products.

Decentralized Finance (DeFi) was also a major theme throughout the year, as total value locked (TVL), the dollar amount of cryptocurrencies deposited onto DeFi protocols, hit all-time highs. TVL first breached $1 billion in February, before hitting $10 billion in September, and went as high as $14 billion in December, according to data from DeFi Pulse. Notably, the yield-farming craze started in June with the distribution of Compound’s COMP governance token to active users of the protocol. This proved popular with the DeFi community and led many other projects to release their own governance tokens in a similar manner. “Yield farming” involves locking up ones crypto on a protocol and receiving fees and/or a governance token as a reward.

There were several notable regulatory developments in 2020, including a letter from the Office of the Comptroller of the Currency (OCC) in July, which stated that federally charted banks and thrifts could custody crypto assets. The OCC also said in a September letter that national banks and federal savings associations could hold deposits that act as reserves for stablecoins, effectively providing greater regulatory certainty for banks to provide certain services to stablecoin issuers. More controversial regulatory actions included the STABLE Act, introduced in December, which aims to regulate stablecoin issuers. One of the requirements would be for stablecoin issuers to obtain a federal banking charter, which could be difficult for many current stablecoin issuers, such as MakerDAO. Later in December, FinCEN proposed rules regarding hosted and nonhosted wallets, but is allowing a comment period until early January 2021. The proposed regulation includes requiring hosted (trading platforms) wallets receiving or sending cryptocurrency totaling $3,000 or more to/from a nonhosted (private) wallet to obtain personal information about the owner of that wallet, and report on those transactions totaling $10,000 or more to FinCEN. There is some concern in the crypto industry that this could stifle DeFi growth, given that some protocols have no way of capturing user information. A separate regulatory development involves the SEC suing Ripple Labs, claiming sales of its XRP cryptocurrency were an illegal securities offering. These recent developments will certainly be interesting to see play out in 2021.

A final theme during 2020 was the rise of interest in Central Bank Digital Currencies, or CBDCs, partly driven by COVID-19, which saw the need for more efficient ways to distribute government stimulus. Central banks worldwide expressed interest in exploring a digital currency, including the Fed, ECB, and BoJ. Some central banks, such as Sweden’s central bank, have already kicked off pilot projects. Most notably, China’s central bank has been testing its digital yuan throughout the year. CBDCs will likely dominate headlines in 2021, and it will be exciting to watch whether China broadly rolls out its digital yuan.

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