To both onlookers and those familiar with crypto, it may have looked like 2017 was a year that was hard to match. After nearly a decade of modest increases and limited use, Bitcoin prices exploded from around $2,000 to above $19,000 in December 2017. A precipitous crash followed all too soon in early 2018. For many casual market watchers, that cycle of rapid spike and quick collapse permanently tainted their opinions of cryptocurrencies.
In 2020, we’ve seen another spike in Bitcoin‘s price, from $4,000 when the pandemic lockdowns began to over $28,000 in December. Are we looking at a reprise of 2018’s cataclysmic crash?
In his retrospective on 2020, Konstantin Anissimov reports this year has been the best year for Bitcoin and other cryptocurrencies so far. Looking ahead, Anissimov sees the first half of 2021 shaping up to be the opposite of 2018’s infamous bear market.
“This time is different” are famous words, whether or not they turn out to be true. Here are the differences Anissimov identifies that distinguish 2020’s performance from 2017.
FOMO on Wall Street leads to institutional crypto investments
The entrance of institutional money was long touted as one of the most significant turning points for the crypto market, as it would provide stability and facilitate development in the industry. While institutions began slowly dipping in back in 2018, this year saw some big bets being made, from MicroStrategy’s $450 million move into crypto to names like Square, Galaxy Digital, MassMutual and Grayscale all bolstering their holdings substantially.
With institutions holding 890,000 Bitcoin, or around 4% of all tokens in circulation, and constantly increasing their exposure, many have pointed out that firms are now taking control of the market. The reasons behind this exponential increase in interest are fairly clear. This increased institutional interest in all things crypto helped overcome the inertia of governments around the world, leading to legal and regulatory clarification that brought crypto out of the shadows.
Regulation (finally) starts to catch up
Remember when Bitcoin was only for buying drugs or guns on Silk Road? Because nobody knew what else to do with it? Improved crypto regulations have largely done away with the ICO mania of 2017 that, for many, was either dubious or outright fraudulent. Even better, clarifying the financial and regulatory status of cryptocurrencies paved the way for the big institutions to begin buying and building frameworks around crypto.
Governments and central banks have helped bring about a move toward decentralized finance that is now letting developers and institutions unveil their projects in a transparent manner while offering reassurance to would-be participants.
Investors look to crypto
The crypto boom was also timely for many portfolio managers, as it coincided with a shift in traditional markets. Back in the good old days (before 2008), portfolio managers balanced risk and reward using stocks and bonds. A healthy chunk of balanced portfolio assents went into Treasurys, German bunds, or other central-bank-issued AAA-rated bonds. Their role in the portfolio was to match inflation and gain in value when stocks faltered (inverse correlation).
Alas, the pandemic brought us a return to 2008’s more-or-less zero yields on top-rated bonds worldwide. No sensible investor is interested in assets that lose value when inflation is factored in.
This, in turn, has caused funds to take a look at Bitcoin and other cryptocurrencies as alternatives that fulfill a similar purpose in a portfolio. Crypto price correlation to other asset classes like stocks, bonds, gold, and so forth are difficult to measure and are still being studied. In addition, cryptocurrencies have the potential to add significant real returns because their value seems untethered from inflation, currency risk, and the many complexities of commodities investing.
Central banks get into digital currencies
The legitimacy of digital currencies was significantly bolstered by the rapid work on central bank digital currencies (CBDCs). Whether due to social or economic reasons, central banks around the world have expedited their development of CBDCs, with China’s digital yuan serving as perhaps the most prominent example.
It remains unclear how exactly CBDCs will be used by both the official sector and citizens of sovereign nations, and whether a replacement of cash will be something that governments will actively seek out. Nonetheless, the government-backed nod towards blockchain technology has all but affirmed the long-term value of cryptocurrencies for most.
Bitcoin’s latest all-time high
There’s no way to talk about 2020 without mentioning Bitcoin’s price. Having jumped from $7,193 in February to over $28,400 in December, the top token nearly quadrupled in value during the stretch and appears eager to post more gains before the year ends.
With some forecasters expecting Bitcoin to pass the $30,000 mark over the next few months, the next few years could very well top what has turned out to be the best year in the crypto market’s history.