When I think about 2020, I find it hard to think of another year in the past few decades with so many all-time highs and all-time lows.
From the COVID-19 pandemic affecting the world’s population to record-breaking forest fires in the western United States to numerous other disasters, the world has often figuratively and literally gone up in flames this year.
This post is part of CoinDesk’s 2020 Year in Review – a collection of posts, essays, and interviews about the year in Crypto and beyond. Garrick Hileman is the lead researcher at Blockchain.com and visiting scholar at the London School of Economics. Current research interests include governance, digital entrepreneurship, financial repression, and measuring crypto-asset adoption.
That death and destruction was juxtaposed with scenes of pandemic communities banding together and celebrating frontline workers, innovations such as the amazingly rapid vaccine development and the first privately funded, human-flown space launch of a reusable rocket and the red hot markets and crypto Asset space, the focus of this article.
I believe we will look back in years to 2020 as a critical turning point in the wider adoption of crypto-assets and blockchain technology.
From the long-heralded and anticipated rollout of the institutional crypto rollout, to the acceleration of digital currency and pandemic-triggered payments, to greater clarity on regulation in major jurisdictions like the U.S., I think 2020 has proven to be crypto’s best Year.
What can we expect for crypto on the way into 2021?
Two macro-forces that drove the rise of crypto assets like Bitcoin to another new all-time high this year are showing little sign of slowing.
1. Oversized government spending and money pressures
Arguably the biggest factor driving crypto asset valuations and uptake is concerns about government spending and monetary stimulus. Indeed, even before the pandemic, debt was worrying and many (myself included) raised alarms about the level of public debt in World War Without World War.
As justified as the general bipartisan pandemic stimulus may be, the simple mathematical reality is that the value of relatively scarce assets often increases as governments and central banks suppress interest rates and increase the money supply.
Simply put, more fiat currency and debt chasing a finite number of things (e.g. Bitcoin) means a higher price to pay for those things.
Within the crypto space, the biggest winner of this trend is Bitcoin, which appears to have reached a broader product market this year on Wall Street and elsewhere as part of its “digital gold” investment thesis.
In fact, there has been some recent evidence that some investors are converting some of their gold portfolio allocation to Bitcoin, alongside growing inflation fears. A continuation of this trend would strongly support a further appreciation of the Bitcoin price.
See also: US dollar deterioration, inflation metrics are a good sign of Bitcoin’s ongoing rally
With several promising vaccines emerging, the COVID-19 pandemic and associated harmful economic restraints are likely to ease at some point in 2021. However, there will continue to be an unprecedented global debt overhang, raising debt sustainability concerns and an optimistic tailwind for algorithmically constrained crypto assets for the foreseeable future.
2. Economic and geopolitical tensions between the US and China
Even with the impending change in US presidential administrations, geopolitical and strategic competition between the world’s two superpowers – China and the US – is unlikely to subside.
What this evolving clash of superpowers means for crypto is something we are only just beginning to understand, but some likely outcomes are:
All of these developments are broadly positive for relatively decentralized crypto assets like Bitcoin and Ether.
While digital currencies can pose challenges for the central bank to some centralized crypto asset networks (e.g. stablecoins) in the form of increased competition and regulatory scrutiny, the further digitization of fiat currencies and payments for decentralized crypto assets such as Bitcoin more complementary than competitive. that will have less design overlap. For example, central bank digital currencies will not have a finite supply like Bitcoin’s 21 million coin hardcap, and it is extremely unlikely to have the same level of censorship resistance and confidence minimization as Bitcoin.
Bitcoin is a powerful tool for promoting freedom and the values of open society.
A mixed picture of global governance means that the kind of widespread and coordinated crackdown on regulators suggested by hedge fund manager Ray Dalio and others is unlikely to occur if crypto ever gets “too big”. And a multipolar global financial system, divided into areas of influence of the US and China, arguably creates space and motivation for more neutral blockchain-based assets and financial infrastructures.
Monetary historian Niall Ferguson (my PhD advisor) also recently argued that part of the reason the US should adopt Bitcoin and crypto assets is to support a more privacy-conscious and open financial system, as opposed to the more centralized, China’s Digital currency, the DCEP, is actively promoted through its central bank.
The question also arises of who controls or influences the largest public blockchains like Bitcoin and Ethereum. The incumbent US currency auditor Brian Brooks recently resented China’s oversized influence on cryptocurrencies like Bitcoin due to its dominant stake in the computational mining power that secures blockchain networks. These concerns about the Chinese influence on Bitcoin and Ethereum were also recently confirmed by Ripple in its response to the recent lawsuit filed by the Securities and Exchange Commission.
The growing support for crypto among those concerned with democratic values and the global balance of power could mean that we will soon see one of the most positive developments for crypto assets as well: governments that have a direct role in supporting and even owning it of crypto assets.
While admittedly speculative, it can be imagined that both the US and China will benefit from wider adoption of crypto assets like Bitcoin.
As I pointed out earlier, by actively acquiring Bitcoin, a rising financial superpower like China could potentially skip the reserve asset rankings cheaply. FOMO is not limited to private market participants, and first-mover nation-states will benefit most from it in any race to acquire new reserve assets. As an American, I hope the US will think twice before rushing to auction off the recent law enforcement seizure of nearly 70,000 bitcoins connected to the closed Silk Road marketplace.
See also: Mable Jiang – Bridging Cultural Gaps in 2021: Crypto in China and the US
At the same time, the US and other democratic countries are increasingly seeing that permissionless and relatively decentralized blockchain networks are similar to the open internet: an effective tool for promoting freedom and the values of the open society.
Accelerating after the pandemic
I hope the pandemic and its punishing economic and social restraints will end in the next year, but there is little reason to believe that the accelerated adoption of crypto we are currently watching will come with it.
This year cemented the notion that crypto assets will not only not go away, but will be an integral part of our financial lives going forward. As we close a very busy and historic 2020, the future has never looked better for owning and using Bitcoin and crypto assets.