An Unprecedented Year Just Set The Stage for Unprecedented Change in Financial Services with Blockchain & Cryptocurrency

The closing of 2020 has seen unprecedented moments with COVID-19 and the many triggered events and reactions, from vaccine production, to monetary policy, to remote ways of working. At the same time, we have seen significant progress with cryptocurrency development and adoption, including Bitcoin reaching all-time highs, significant enterprise and institutional adoption,

The key drivers and catalysts of this change are perceived to include the post-COVID monetary policy and risk of inflation, institutional adoption, real practical use case development and adoption, and organizations starting to exchange portions of their balance sheet from fiat to Bitcoin.

Let’s dive in to the biggest trends we’ve seen this year. For authoritative views on the year we have had, also check out the Consensys Year in Review 2020.

Bitcoin hit an all-time high.

As of December 26th, Bitcoin had hit a new all-time high and exceeded a $25k USD valuation, which is believed to be driven in part by the increased institutional participation in the largest cryptocurrency in the market, including MassMutual, Skybridge Capital, and Guggenheim. As we head into the last few moments of 2020, it continued to set new all-time highs above $28.5k.

Read more here to better understand the full year of Bitcoin and its price action.

The enterprise and institutions have embraced Bitcoin.

Organizations willing to either (1) convert portions of cash on its balance sheet to Bitcoin or (2) generally invest in the same, have seen a significant uptick recently with leading institutions. For example: MicroStrategy appears to have paved the way when the firm announced over $1B in total Bitcoin purchases in 2020 in order to convert much of its balance sheet from cash to Bitcoin, including a recent $650m incremental purchase. MassMutual executed a $100m purchase of Bitcoin for its general investment account. Square invested $50m into Bitcoin in order to exchange 1% of total assets from fiat to cryptocurrency. Anthony Scaramucci’s Skybridge Capital launched a $25 million Bitcoin fund this month, and has invested $182 million in total in Bitcoin. Guggenheim filed to be able to invest in up to $500m in Bitcoin.

Additionally, individual investors with strong legacies and historical performance have put capital into Bitcoin or offered endorsement, including: Paul Tudor Jones, Stanley Druckenmiller, and Ray Dalio.

More broadly, a number of firms that have declared Bitcoin as Digital Gold, Gold 2.0, or a viable Store of Value (SoV) with values that are an order of magnitude above today’s prices, including announcements from the following leading financial institutions:

Citibank, Wells Fargo, Fidelity, Bloomberg, Deutsche Bank, Jeffries, Blackrock, and Guggenheim.

ETH 2.0 launch and staking

Officially launched in December, Ethereum 2.0 (or Eth2) is a “major upgrade to the current Ethereum public mainnet, designed to accelerate Ethereum’s usage and adoption by improving its performance.” (5, Consensys).

In order to trigger the launch of the smart contract for Phase 0 of Ethereum 2.0, a deposit contract required that 524,888 ETH be staked, of which the threshold just recently cleared! (1, Coindesk)

One of the biggest aspects of the upgrade is shifting the Ethereum consensus mechanism from a Proof of Work (PoW) to Proof of Stake (PoS) model. PoW is the most common consensus mechanism currently used by Bitcoin, Ethereum, and others. Network nodes are run by miners which expend compute resources in order to solve complex mathematical problems in a competition to mine the next block, execute those transactions and add that block to the blockchain, adding to the authoritative distributed ledger. This time and computational energy (money) to run their node hardware, electricity consumption, etc., is rewarded to the miners that successfully mine a block into existence. While extremely secure, this model does not lend itself toward scalability and accessibility (2, Consensys).

On the other hand, PoS replaces these components of miners and electricity with validators and staking. A validator replaces a miner as the individual or node that contributes toward the agreed upon state of the network and confirmation of transactions on the blockchain, and rather than providing their computational resources, provide their “stake” by committing 32 ETH to the system. Rather than using their nodes to “work” toward the answer, they “stake” their ETH in order to propose and attest to new blocks on the Ethereum 2.0 blockchain (2, Consensys).

The anticipated benefits and improvements from PoS include: scalability, energy efficiency, lower barriers to entry, stronger crypto-economic incentives, and greater revenue-generating capabilities for a broader set of users (3, Consensys).

You can read more about the characteristics and differences between Proof of Work (PoW) and Proof of Stake (PoS) here. You can also read more here on the Ethereum 2.0 launch and how it supports the Decentralized Finance (DeFi) movement.

The lines begin to blur with classic financial institutions, digital natives and crypto natives

One of the first classic financial institutions to launch crypto services after digital native Robinhood, and crypto natives Coinbase and Gemini, PayPal has officially launched a crypto offering of its own. While the release is limited and incremental

Additionally, the Coinbase IPO was announced for 2021, which is a first for the US markets and a huge validation for the industry, while offering institutions an indirect way to gain exposure to the cryptocurrency markets. Coinbase had already begun to blur the lines between the industries when JP Morgan took on both Coinbase and Gemini as its first customers in this domain to provide banking services to each.

Enterprise financial products and instruments.

A number of positive developments have recently been made as well in the enterprise, here are some key highlights:

Visa has announced the support to enable USDC payments by integrating its global payments network with the cryptocurency. USDC is an Ethereum Digital Dollar or stablecoin startup, and crypto native firm Circle Internet Financial.

CME Group announced Ethereum futures for 2021, in addition to the Bitcoin futures they have already launched and maintain as a cryptocurrency product.

The S&P Dow Jones Indices have announced they will launch a cryptocurrency index in 2021.

Organizations like Microsoft, and over 600 others have collaborated to develop the Baseline Protocol. where corporates can use the Ethereum public mainnet as a common frame of reference among different systems of record (4, Coindesk).

Finally, with respect to crypto natives, the DeFi wallet Argent has conducted a large expansion to support Yearn, Aave and Balancer, in addition to every other leading DeFi product that resides on the Ethereum blockchain.

Where do we go from here?

The stage has been set for both crypto-native platforms (Ethereum, Argent), and leading classic Financial Institutions to adopt and scale these platforms with real world, practical use cases for both consumers and the enterprise in ways that improve upon the existing system via cost, transaction volume, security, and ease of use.

Let’s stay close to each of these trends to see how they play out as we head into 2021.

References cited.

1. Ethereum 2.0 Deposit Contract Secures Enough Funds to Launch. https://www.coindesk.com/eth-2-0-deposit-contract-secures-enough-funds-to-launch

2. What Is Ethereum 2.0? https://consensys.net/blog/blockchain-explained/what-is-ethereum-2/

3. What is Proof of Stake? https://consensys.net/blog/blockchain-explained/what-is-proof-of-stake/

4. ‘Boring Is the New Exciting’: How Baseline Protocol Connected With 600 Corporates. Coindesk. https://www.coindesk.com/baseline-protocol-enterprise-ethereum

Other and embedded references.

1. Bitcoin Tops $26K for First Time, Less Than a Day After Passing $25K. Coindesk. https://www.coindesk.com/bitcoin-tops-26k-for-first-time-less-than-a-day-after-passing-25k

2. MicroStrategy Splurges Another $650M on Latest Bitcoin Investment. Coindesk. https://www.coindesk.com/microstrategy-buys-bitcoin-debt

3. MicroStrategy Announces Over $1B in Total Bitcoin Purchases in 2020. https://www.microstrategy.com/en/company/company-videos/microstrategy-announces-over-1b-in-total-bitcoin-purchases-in-2020

4. Investment Strategy: Wells Fargo Investment Institute — December 21, 2020. Wells Fargo. https://www.wellsfargo.com/investment-institute/investment-strategy-report/

5. MassMutual Joins the Bitcoin Club With $100 Million Purchase. Wall Street Journal. https://www.wsj.com/articles/massmutual-joins-the-bitcoin-club-with-100-million-purchase-11607626800?redirect=amp#click=https://t.co/QtNJYSQtld

6. Ethereum will fix enterprise tech. Bankless. https://newsletter.banklesshq.com/p/ethereum-will-fix-enterprise-tech?r=nf8t&utm_campaign=post&utm_medium=web&utm_source=copy

7. Visa Partners With Ethereum Digital-Dollar Startup That Raised $271 Million. Forbes. https://www.forbes.com/sites/michaeldelcastillo/2020/12/02/visa-partners-with-ethereum-digital-dollar-startup-that-raised-271-million/?__twitter_impression=true&sh=3df36c554b1f

8. Square, Inc. Invests $50 Million in Bitcoin. https://squareup.com/us/en/press/2020-bitcoin-investment

9. Citibank Analyst Says Bitcoin Could Pass $300K by December 2021. Coindesk. https://www.coindesk.com/citibank-bitcoin-gold-318k-2021

10. The View on Bitcoin From Inside Fidelity Digital Assets, feat. Ria Bhutoria. Coindesk. https://www.coindesk.com/bitcoin-fidelity-digital-assets-ria-bhutoria

11. Bitcoin on track for $100,000 in 2025, historical growth guides. Bloomberg Intelligence. https://www.bloomberg.com/professional/blog/bitcoin-on-track-for-100000-in-2025-historical-growth-guides/

12. Deutsche Bank Says Digital Currencies Could Be Mainstream in 2 Years. Coindesk. https://www.coindesk.com/deutsche-bank-says-digital-currencies-could-be-mainstream-in-2-years

13. Scaramucci’s Skybridge Invested $25M in New Bitcoin Fund. Coindesk. https://www.coindesk.com/scaramuccis-skybridge-invested-25m-in-new-bitcoin-fund

14. Guggenheim Fund Files to Be Able to Invest Up to Almost $500M in Bitcoin Through GBTC. Coindesk. https://www.coindesk.com/guggenheim-fund-files-to-be-able-to-invest-up-to-almost-500m-in-bitcoin-through-gbtc

15. SkyBridge Capital Has Already Invested $182M in Bitcoin. Coindesk. https://www.coindesk.com/skybridge-capital-has-already-invested-182m-in-bitcoin

16. Decentralized Finance (DeFi) in 2020 and its future trajectory. LinkedIn. https://www.linkedin.com/pulse/decentralized-finance-defi-2020-its-future-trajectory-matthew-leybold/

17. S&P Dow Jones Indices to launch cryptocurrency indexes in 2021. Reuters. https://www.reuters.com/article/cryptocurrencies-sp/sp-dow-jones-indices-to-launch-cryptocurrency-indexes-in-2021-idUSL1N2IJ0TG

18. CME Group announces Ethereum futures product. The Block Crypto. https://www.theblockcrypto.com/linked/88028/cme-group-announces-ethereum-futures

19. Bitcoin Prices in 2020: Here’s What Happened. Coindesk. https://www.coindesk.com/bitcoin-prices-in-2020-heres-what-happened

20. Consensys Year in Review 2020. Consensys. https://consensys.net/year-in-review-2020/

21. Here Is What the Upcoming Coinbase IPO Means for Bitcoin. Nasdaq. https://www.nasdaq.com/articles/here-is-what-the-upcoming-coinbase-ipo-means-for-bitcoin-2020-12-28

22. JPMorgan Bank Takes on Coinbase, Gemini as Its First Crypto Exchange Customers. Coindesk. https://www.coindesk.com/coinbase-gemini-first-crypto-exchange-customers-jpmorgan-bank-report

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