The COVID-19 pandemic undoubtedly harmed the world economy in 2020. The Federal Reserve Bank started printing dollars more than usual, increasing supply. Thus the value of the dollar fell, inflation rose and the world economy is not seeing good days.
However, the COVID-19 pandemic did not harm cryptocurrencies. Their price fell in March 2020, then rose towards a bullish period at the end of the year. This happened because, with the fall of the dollar, investors saw cryptocurrencies as a hedge against inflation and store of value. So, the COVID-19 pandemic not only did not harm cryptocurrencies but went in their favour.
Just take a look at how BTC has been growing throughout the year:
Indeed, 2020 was an exciting year for cryptocurrencies. Here is what happened and how 2020 became the determinant of the direction that cryptocurrencies will take in the coming years.
7 Crypto Predictions for 2021:
1. 2020 - The year when fiat lost its credibility
From the beginning of the COVID-19 pandemic, the gold, stocks and Bitcoin market fell by about 30% in value. However, gold and stocks could not recover, unlike Bitcoin, which returned strongly.
Source: Capital.com
The COVID-19 pandemic caused panic among investors, and they started selling their assets en masse. They also sold the cryptocurrencies they owned, which made us realize that they were cryptocurrency owners and they used cryptocurrencies alongside traditional financial assets.
Source: mining.com
When everyone thought the COVID-19 pandemic would go away quickly, it did not turn out that way. Once it was realized that it would last longer than expected, causing even greater damage to the economy, then the US government decided to give the economy an "infusion" similar to that of 2008, during the financial crisis at the time. In 2020, $9 trillion were added into the US economy. At the same time, this amount represents 22% of the dollars created in total since America’s existence as a nation.
Source: https://fred.stlouisfed.org/series/M1
The printing of the dollar was seen as an adequate solution to the problem of the economic crisis. Still, it seems that economists did not think about the long-term consequences that this method could bring to the economy. With the appearance of the problem of inflation, investors have already begun to look for other alternatives.
This is precisely the moment of Bitcoin, which started to rise in price, despite other assets.
With the COVID-19 pandemic that brought quarantine and curfews, elections were approaching. Elections usually have an impact on the stocks market and gold, generally negative. Therefore, even in this case, the price of stocks and gold started to fall again. Everyone was expecting the same thing to happen with Bitcoin. But guess what? It never happened. Bitcoin only soared high.
Since the stock market and gold were no longer considered options by investors, Bitcoin became their favourite asset, as they saw potential in it.
Aside from the fact that Bitcoin was already considered the preferred asset among investors to invest, everything was going in his favour, given that on October 21 Paypal decided to allow buying, selling, and holding digital currencies in their platform.
The news that Paypal integrated cryptocurrencies into its platform caused a stir and boosted the price of Bitcoin. This event would be followed by even more investors, who would join the crypto world.
In addition to these external factors that influenced the price of Bitcoin, internal factors also came to the fore. Bitcoin halving took place in May 2020, and historically after halving the price of Bitcoin has increased. The same thing happened this year.
In July 2016, when halving occurred, the Bitcoin price was at $600. 17 months later in December 2017, it reached the record $20,000.
When Bitcoin halving took place in May 2020, its price was $8,700. Within six months it rose to $15,500, registering a 78% increase. Then, on January 8, 2021, it reached its all-time high at $41,941.
Also, in 2020, Decentralized Finance (DeFi) has been on the rise with Ethereum’s blockchain at the top, being adopted more and more.
Cryptocurrencies have never been closer to mass adoption than in 2020. Indeed 2020 was exciting for the crypto sphere. Crypto enthusiasts, based on the way things are going, believe that 2021 will be interesting for cryptocurrencies as well. Let's see what is expected to happen with cryptocurrencies in 2021.
2. Bitcoin towards being an international payment currency
Cryptocurrencies are the preferred means of payment by Millenials. And Paypal will enable them to do so.
Paypal, as mentioned above, enables users to buy cryptocurrencies. The platform will also enable them to pay for products purchased with cryptocurrencies in the 26 million merchants that the platform has, without applying fees.
Users will be able to do this since the platform will allow them to convert their crypto balance to fiat. It’s worth mentioning that Paypal has 340 million users and that in itself tells us what the impact is in cryptocurrencies.
3. Institutional demand has grown - The vaccine could hardly make an impact on Bitcoin
Is there a possibility that the COVID-19 vaccine could affect the crypto bull-run in 2021? However, the vaccine may have a greater effect on the stock. When people will start taking it then the value of the stocks will increase.
Vaccination, however, is not expected to impact the price of Bitcoin significantly, given that cryptocurrencies are independent and not heavily influenced by various factors that could have an impact on traditional financial assets.
It should also be borne in mind that the vaccine may not succeed in stopping the pandemic, and thus the economic crisis may continue.
So, in all likelihood, investors will continue to see Bitcoin as a hedge against inflation and store of value. They might continue to invest, and since supply is cut in half in May when Bitcoin halving occurred, then, here we can apply the basic rules in economics "when demand increases and supply decreases price rises". Therefore, we may see Bitcoin towards new records in terms of price in 2021.
Moreover, institutional investors have spiked the Bitcoin price up, as they have shown a tremendous interest to invest in cryptocurrencies.
Microstrategy decided to invest $1.3 billion in Bitcoin; Ruffer Investment invested $744 million; Square invested $50 million; Stone Ridge, $115 million and Massachusetts Mutual invested $100 million in Bitcoin. These are some of the most significant investments by large institutional investors in 2020. With all these investments, the authority and value of cryptocurrencies began to grow.
Moreover, Grayscale Fidelity Investments, Ark Investment Management, and other funds have added crypto to their portfolios in 2020. In their report, Grayscale claims that in 2020, Grayscale Bitcoin Trust was among the quickest growing investment products in the world, growing from $1.8 billion to $17.5 billion. This is a fact and another statistic that has never been encountered before in the history of cryptocurrencies and is a clear indication of the growth they experienced in 2020.
Furthermore, JP Morgan started banking Gemini and Coinbase. Also, Visa and Mastercard began providing services to cryptocurrency companies, and Fidelity introduced a new Bitcoin index fund.
Nasdaq has reported that institutional investors pumped $439 million in crypto funds only in the first week of December 2021. Based on the data of CoinShares – the digital asset investment firm this was the second-largest weekly inflow of ready cash into the crypto market after the record high inflow of $468 million that had been made three weeks earlier.
4. Bitcoin could beat gold as it is serving as a hedge against inflation
Investment inflow in Grayscale Bitcoin Trust (GBTC) has grown appreciably in October in comparison to investment in Gold ETF which has remained relatively unchanged.
Source: Michael Sonnenshein
According to JP Morgan’s note, which lays out a bullish case for cryptocurrencies, gold will face a "structural flow headwind" as investors shift loyalty and money to Bitcoin.
5. The launch of Ethereum 2.0 marks a pivotal point for DeFi and crypto development
The launch of Ethereum 2.0 was such a highly anticipated event among crypto enthusiasts. The purpose of launching Ethereum 2.0 was to improve scalability and security. With Ethereum 2.0, things will be different, as more investors may be attracted because Ethereum 2.0 creates favourable conditions for more improvement in the DeFi sector.
The cryptocurrency industry is evolving, and various companies have adopted Ethereum’s blockchain. For example, Microsoft adopted Ethereum's blockchain for gaming royalties, which was a big step.
Ethereum 2.0 uses the Proof Of Stake (PoS) model, which makes it more favourable when it comes to passive income. For example, holders who have at least 32 ETH will have the option of staking rewards. Tokens will stay on the net for a long time, and owners will enjoy rewards more or less like depositing money in a bank in the traditional financial system.
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6. Regulators could be more rigorous as cryptocurrencies and blockchain technology keeps expanding
As cryptocurrencies are growing at a rapid pace, they have caught the eye of regulators, who of course are not standing idly by. Some rules have already started to be issued, such as KYC & AML policies for all EU and US-based crypto exchanges and FCA registration for businesses operating in the UK.
Recently, the Securities and Exchange Commission SEC charged Ripple and two executives with conducting a $1.3 billion unregistered securities offering. Cryptocurrencies have often been associated with black markets. Therefore regulators have begun to pay special attention to them.
Also, recently The Financial Conduct Authority (FCA) in the UK warned investors to be careful when investing in cryptocurrencies because according to them, they can be "scams".
Moreover, the DeFi sector in cryptocurrencies remains unregulated. This is one of the reasons why investors are reluctant to invest in this sector because they feel insecure. For investors, regulations mean security. Therefore, we need to talk to regulators to create a transparent system, and a regulatory framework, which would serve as an investment guide or a "door key" for big players.
While DeFi is not regulated the only option to continue operating is in decentralized exchanges as more centralized exchanges are implementing KYC and AML policies to prevent illegal activities. There is a large amount of dirty money into DeFi projects. Therefore, many users risk encountering troubles while transferring funds to centralized exchanges.
Hence, unless the DeFi sector is regulated, it is unlikely that there will be large investors. But there are two camps for regulating the DeFi sector: those who support it and those who do not. However, 2021 will likely be decisive when it comes to regulating the DeFi sector.
Read More: An Overall Look At The Cryptocurrency Market - What To Expect In 2021?
7. Central banks could be more involved in crypto by starting to launch their tokens
With the significant growth of the cryptocurrency industry, it seems that governments and banks have no choice but to join the trend by issuing their stablecoins.
An example that can be taken in this regard is the Chinese digital yuan. Adopting national tokens like yuan will help trace money flows across the economy and prevent illegal activities, including terrorist financing and money laundering.
The most significant benefits of national digital tokens will be better financial inclusion and faster cross-border payments.
Lastly, 2020 has really been an interesting year for cryptocurrencies, with many things happening in the industry. But 2021 is not expected to be less exciting either.
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Key Points
- Due to COVID-19 pandemic damages in the economy, The Federal Reserve Bank started printing dollars more than usual, increasing supply. Thus the value of the dollar fell, inflation rose, and investors put their trust towards Bitcoin.
- From the beginning of the COVID-19 pandemic, the gold, stocks and Bitcoin market fell by about 30% in value. However, gold and stocks could not recover, unlike Bitcoin, which returned strongly.
- In 2020, $9 trillion were added into the US economy. At the same time, this amount represents 22% of the dollars created in total since America’s existence as a nation.
- On October 21 Paypal decided to allow buying, selling, and holding digital currencies in their platform. This event would be followed by even more investors, who would join the crypto world.
- When Bitcoin halving took place in May 2020, its price was $8,700. Within six months it rose to $15,500, registering a 78% increase. Then, on January 8, 2021, it reached its all-time high at $41,941.
- Paypal enables users to buy cryptocurrencies. The platform will also allow them to pay for products purchased with cryptocurrencies in the 26 million merchants that the platform has, without applying fees.
- Vaccination is not expected to impact the price of Bitcoin significantly, given that cryptocurrencies are independent and not heavily influenced by various factors that could have an impact on traditional financial assets.
- In 2020, Microstrategy decided to invest $1.3 billion in Bitcoin; Ruffer Investment invested $744 million; Square invested $50 million; Stone Ridge, $115 million and Massachusetts Mutual invested $100 million in Bitcoin.
- Grayscale claims that in 2020, Grayscale Bitcoin Trust was among the fastest-growing investment products globally, growing from $1.8 billion to $17.5 billion.