2019 has in some ways been even more extreme than 2018. There is a growing hope that we are in the last stage of an extended bear market. Fundamentals are pointing in that direction, with the ever discussed halving of Bitcoin inflation to take place in May. Reflecting back on 2019 we have seen two major trends over the course of the past year. Both of which we expect to last well into 2020 and beyond. Regulators are taking an increasingly active stance towards token issuance, cryptocurrencies and the ‘institutionalization’ of Bitcoin. The regulatory hammer, which has only just started to come down, will further clean the ‘crypto optimism’ and culminate in a better, more investable market. The paradigm of Bitcoin being an uncorrelated asset will take a further flight over the course of 2020. In the past, asset managers could point to crypto’s relatively weak infrastructure. However during the past year sentiment has changed now that the likes of Fidelity and ICE have entered the industry. These developments are pointing towards 2020 being an exciting year. Because of this we will predict 10 trends for the year 2020. These trends will be annotated with our underlying rationale. The first 8 will be general industry trends and the final 2 are on-chain metrics for the Bitcoin blockchain.
1. Bitcoin halving will obliterate the old highs
The halving, the reduction of Bitcoin issuance through reducing the block rewards. Will result in a reduction of the inflation from 3,8% to 1,8%. The halving will take place in block 630.000 which is expected to be mined around the 12th of May 2020. We have already seen many opinions on the halving, even some saying that is already fully priced into today’s price and as such a non event. We could not disagree more, and think that a supply shock of this magnitude will lead to very unpredictable behaviour. One year performance after halving was over 5000% in 2012 and a mere 400% in 2016. Obviously we can not draw too strong conclusions from these data points, especially not at this point in time. At the same time we are of the opinion that the culmination of a supply shock via halving, further institutionalization of Bitcoin and positioning as uncorrelated asset will lead to substantial upward pressure on pricing. And the magnitude of the move can only partly be modeled.
2. The rise of CBDC
Central Bank Digital Currency (CBDC) have been receiving more attention in the last 5 years. The announcement of the Libra project by Facebook et al has acted as a flywheel for more urgency from central banks around the globe. In 2019 the Bank for International Settlements noted that five central banks have been running pilot projects with their own central bank digital currency. More recent reports also indicate that the People’s Bank of China is accelerating their development and testing of a digital currency with various commercial banks and a selection of cities in China. Overall there is not a single major central bank that has not expressed interest in the concept of a central bank digital currency.
We believe this is good for all blockchains. This is because these currencies will run on a blockchain, although a private one. In turn this will introduce users to various concepts such as desktop wallets, mobile wallets, confirmation times, smart contracts and other general concepts of digital, programmable money. Consequently, the leap towards recognition of the value of cryptocurrencies and various tokenized assets is easier. In addition, we believe the private blockchains are to public blockchains what the intranet was to the internet. While at first attractive for various legitimate reasons their advantages will diminish over time as the public blockchains are developed further. Eventually resulting in replacement of the private blockchains by their public counterparts. However we do not expect all this to happen in 2020, as central banks are behemoths that need to act carefully and considerate and therefore act more slowly. All things considered our prediction is that at least ten central banks will run proof of concepts with digital currency. Furthermore five central banks will have launched their own central bank digital currency, one of which is a central bank from a G20 economy.
3. Financialization of ETH/BTC and introduction of Ether futures
We expect further financialization of the major cryptocurrencies, Bitcoin and Ethereum. Bitcoin has had institutional grade trading products since 2017. Ethereum has yet to have the first institutional grade trading product based on the native token of the Ethereum network, Ether, to be launched. The progress made for Bitcoin on this frontier will have spillover effects on the digital asset Ether. Combine this with increased regulatory clarity on asset Ether and we estimate further financialization of Ether will take place. Therefore we predict that regulated and CTFC approved Ether futures will be launched in 2020. We also expect the efforts for a Bitcoin ETF to continue and predict more ETF applications coming in. However, we do not expect a Bitcoin ETF to be approved in 2020 because of regulatory hurdles.
4. Decentralized Finance will grow exponentially
Decentralized Finance, or DeFi, was in the seed phase during 2019. A lot of protocols that fall in the DeFi category were and still are under development. We expect maturity from this part of the industry which translates into major growth in 2020 for four major reasons.
First, digital financial assets are a natural fit for blockchains and smart contracts because these assets are intangible. This makes the issuance, lending, trading and further financialization of these assets a good fit for blockchains by avoiding the problem of interacting with the tangible world. Second, the ongoing rise of stablecoins makes it easier to interact with DeFi protocols since it enables using fiat currency as a unit of account. This is easier for users. Third, the disintermediation that DeFi brings to the financial industry makes it more cost efficient and thus cheaper for users. This aligns well with dropping interest rates and people seeking returns outside the traditional financial system. Finally we have seen and will continue to see a rapid development in terms of UX/UI and interoperability of different protocols and assets.
Because of these four reasons we expect an inflow of money into DeFi. Resulting in a predicted growth of 500% YoY for the DeFi part of the industry. This translates to an amount of roughly 15M Ether being locked up as collateral in various DeFi protocols compared to ~ 3M Ether today. This will include Bitcoin coming to DeFi through interoperability solutions such as tBTC and wBTC.
Graph of amount of Ether that is locked in DeFi over 2019.
5. Launch of Ethereum 2.0
Various Ethereum development teams around the world are currently undertaking the most ambitious upgrade in the industry. This effort is referred to as Ethereum 2.0 and introduces the move from Proof-of-Work towards Proof-of-Stake and the sharding scalability solution. Introducing such a major upgrade to a live blockchain is difficult since there is a risk of interrupting the live and operational network, worth USD 15B, which is referred to as “Ethereum 1.0”.
Because of this risk Ethereum 2.0 will be launched in three phases. Phase 0 being the first one, in which users can deposit Ether that will act as a stake and allow them to validate the Ethereum 2.0 chain. During this phase the proof-of-stake sybil resistance mechanism will be introduced but there will not yet be sharding or smart contract execution environment. The launched chain is referred to as the “beacon chain”. This will serve as the backbone of the network once various shard chains are launched, these will all publish attestations on the beacon chain. The validators of the beacon chain will earn a reward on the deposited Ether akin to earning interest in a bank account. It is important to note that during the first phase the Ethereum 2.0 chain and Ethereum 1.0 chain will both be live and be “living” next to each other. As such the Ethereum 2.0 chain phase 0 will not add any functionality to Ethereum, apart from additional inflation. However it will add the ability to earn an interest on your Ether and in addition it will be a stepping stone for further Ethereum 2.0 implementations in phase 1 and 2. However these are not expected to launch in 2020. We estimate the Ethereum 2.0 phase 0 to suffer from a few more delays during the testnet phase as bugs get fixed and to go live in Q4 2020.
6. The increase of regulated funding into the space
In 2020 there will be a further decline in funding obtained from ICO like mechanisms that act in the grey area of laws and regulations. These will partly be replaced by reg A+ or similar token offerings to accredited investors in the US.
The last two years we have observed a clear decline in token based funding. Seeing the current unclear regulatory environment, we expect this trend to continue into 2020. This will result in traditional equity funding to be responsible for the majority of capital being deployed in the industry. We do expect a slight uptick in equity investments as more investors close the knowledge gap and start deploying capital.
7. Major corporates start utilizing public blockchains
Currently the majority of corporations are mostly testing and running proof of concepts on permissioned and private blockchains. There are also some companies, such as EY, that have begun building on top of public blockchains. Recently EY disclosed some of their Ethereum addresses. Consequently, people could see the process of tokenization taking place on these addresses. The address EY disclosed was being used for to provide traceability of wine. This is required for vineyards and wineries that want to sell to Asian markets and provide a proof of origin for their product. While perhaps not the most innovative use-case it is an indication of a larger trend that large corporations start utilizing public blockchains.
We believe this trend will continue in 2020 as more companies will start adopting public blockchains and notice the benefits of public networks compared to private networks. Furthermore, we think companies will publicize their Ethereum addresses to indicate that they are embracing the technology, perhaps also marketing themselves as innovative, and making efforts in utilizing it. As such we predict that at least 10 major companies (> USD 1B revenue) will have shared their public smart contract Ethereum address in 2020.
8. Layer two solutions drive adoption
In 2015 the Lighting Network was first introduced as a “layer two” scaling solution for Bitcoin. Since then various layer two solutions have popped up, all in different shapes and forms and with different trade-offs. While some have not been proven resilient enough to leave the research phase, and others are still under development more recent solutions based on zero-knowledge proofs (so called “roll ups”) have been gaining some traction. This trend will continue because these solutions offer scalability, a better user experience through instant transaction confirmation and arguably more privacy compared to layer one transactions.
We expect the past few years of development to start paying dividends in 2020. Resulting in the increased layer two usage, however wrapping this into one measurable metric is difficult. As a proxy for this usage we will use exchanges accepting Bitcoin deposits through the lighting network. Our estimation is that 5 exchanges will start accepting small Bitcoin deposits through the lighting network in 2020.
9. Bitcoin on-chain metric prediction
After the halving of Bitcoin’s block reward from 12.5 BTC to 6.25 BTC, we will see the capitulation of inefficient miners due to a 50% decrease in their revenue. However, technological advancements in mining hardware will result in a new all time high in hashrate at the end of 2020.
10. Bitcoin on-chain metric prediction
The distribution of wealth in the Bitcoin ecosystem has made a significant development over the past years. The number of Bitcoin addresses that own 1 Bitcoin or more has seen a steady increase, which implies that more market participants are reaping the rewards of the price increase of the past years. We expect this trend to continue in 2020, as media coverage of the halving event will attract new market participants.