Cryptocurrency market 2020 Outlook by Decentral Park Capital
While cryptocurrencies have been in a bear market since August 2019, the
market is well set up for a rally in the short to medium term due to the following factors:
● Strong continuing development and investment across the cryptocurrency space
● Increased Institutional investor participation
● Reduction/end of ‘one-off’ PlusToken liquidation
● Reversal of current ‘Extreme Fear’ sentiment
● Bitcoin halving
In addition, the increased participation of Institutional Investors that we expect in the cryptocurrency market in 2020 should have three big implications:
1. Fundamentals should be a more important factor on prices
2. Volatility should structurally fall
3. Valuations should increase
These have historically been the results when ‘traditional’ Institutional Investors enter an asset class, and were the pattern repeatedly seen in emerging markets and commodities.
2019 in review and outlook for 2020
Decentral Park Capital
January, 2019
Authors: Elias Simos & Kevin Dougherty
DPC’s short-to-medium-term view on the cryptoasset market
Author: Elias Simos, Senior Research Analyst at decentralpark.io
1
DPC
:
2019 in review and outlook for 2020
Cryptoassets in transition
;
a
review of 2019 and
DPC’s
fundamental outlook
for the medium term
-
by Elias Simos, Senior Research Analyst
2019 has been quite a ride for global markets. The year started with a rallying S&P and confident
market
s, a
sentiment that soon after
transitioned into fear, uncertainty and doubt, as the Sino
-
American trade war took center stage and the yield curve inverted for the fi
rst time since 2008,
summoning fears of an impending recession. In that environment, cryptoassets had a mercurial H1
2019, coming off of a brutal bear market in 2018. Emerging cryptoassets within the cluster
outperformed the
market
average in Q1, passing the bato
n to Bitcoin in Q2, which led the way with a
230% appreciation, bottom
-
to
-
top, from April to July 2019. At the time, there were strong indications
that the pent up demand for capital flight from China found a suitable vehicle in Bitcoin, as global
economic
uncertainty rose [
1
].
This
did not sustain for long, leading the overall asset class to deflate
by ~50% over the c
ourse of H2 2019.
Source: policyuncertainty.com & coinmarketcap.com
Although Bitcoin failed to meet expectations set by the excitement garnered by 1H19’s run
-
up to $13k
per BTC, the asset class overall is once again the best performing for the
year, returning +90%
beginning to end, whereas the NASDAQ returned +38%, the S&P +31% and REITs +27%. Be that as it
may, the sentiment among market participants
-
at present
-
is much bleaker than the absolute YoY
performance implies, reminding us that bia
ses are omnipresent in how sentiment manifests in
Author: Elias Simos, Senior Research Analyst at decentralpark.io
2
DPC
:
2019 in review and outlook for 2020
markets. In this case, it is an anchoring bias
1
, a recency bias
2
and loss aversion
3
in full effect [
2
]. As
Bitcoin descended from July highs
for most of 2H19, the trade war fears were dispelled
,
and under the
onlook of a dovish Fed
the Dow and the S&P both broke to new all
-
time highs. Considering the
developments within the world of cryptoassets, we are
-
quite frankly
-
dumbfounded by the wea
k
sentiment. While being cognizant and appreciative of the limitations of cryptoassets and the
challenges that lie ahead,
we cannot help but continue to be optimistic about the
medium
-
and long
-
term
prospects of the asset class.
2019: a year of quiet infr
astructure development
Our thesis has always been that there are two forces that charge adoption prospects for cryptoassets;
1. top
-
down adoption by
legacy finance
institutions
, and 2. bottom
-
up adoption of Web 3.0 and Open
Finance innovations and p
rimitives by the general public. 2019 was a year of steady infrastructure
development and deployment in both of these areas.
Top down
2019 saw a continuous stream of innovation in institutional infrastructure, with cornerstone products
such as
digital asset custody and derivatives being delivered and further developed from both legacy
players such as Fidelity, ICE and the CME [
3
], as well
as crypto native players such as Coinbase, BitGo
and Binance [
4
]. These advances are bringing mature and trusted prime brokerage solutions c
loser to
the cryptocurrency industry, and will enable the deployment of ever more complex strategies at scale,
while simplifying the complexity at the base layer of this technology,
for the end
-
user
.
At the same time though, 2019 saw multiple rejections of applic
ations for a Bitcoin ETF
-
and for
good reason. The market is still fairly fragmented, small and immature for an ETF, with a prime
example being the lack of a generally accepted and agreed upon true price of Bitcoin. Despite this, in
December 2019 Charles
Schwab reported that Grayscale’s Bitcoin Trust is the 4th most popular equity
amongst
Millennials
in their customer base
-
more popular than Netflix or Berkshire Hathaway [
5
].
1
Anchoring the evaluation of how the asset has performed fr
om the $13k highs and not from the $3k lows.
2
Overweighing the short
-
term to the detriment of the medium term.
3
This reflects the idea that the emotional content of losses outweighs that of gains of equal magnitude. In
this case, the emotional
content of the 50% drawdown in H2 is overweighting Bitcoin’s ~70% YoY
outperformance vs the S&P 500.
Author: Elias Simos, Senior Research Analyst at decentralpark.io
3
DPC
:
2019 in review and outlook for 2020
As progress in data pipelines is made and liquidity improves, the uncertainties around the asset class
will become increasingly less, at which point we expect to see the develo
pment of products that will
make Bitcoin’s inclusion into ISAs (Individual Savings Account) and IRAs (Individual Retirement
Account), a matter of routine. While we do not believe that this will become commonplace in 2020,
we do believe we will see material
progress in that direction, both in regulations, and in market
structure/infrastructure
4
. Once that milestone is cleared, and the asset class has grown sufficiently to
become even more generally accepted, the probability of it being included
in
pension fund
and
endowment
portfolios
increases dramatically. The most forward thinking of the largest allocators are
already getting smart in and around the asset class, primarily via allocating to Venture Capital [
7
],
while some have started dipping their toes in direct token purchases
5
.
Source: yahooo.finance
The last but perhaps most important piece of the puzzle for top down
adoption is regulatory clarity
-
or, at present, lack thereof. Bitcoin’s Q2 ascent was accompanied by the announcement of Libra
-
Facebook’s blockchain
-
based stablecoin initiative, that would
-
upon launch
-
bring digital wallet
infrastructure to Facebook’
s massive user base
6
. Libra’s launch was soon put on hold by US lawmakers,
with both Mark Zuckerberg and David Marcus (Libra CEO) having to undergo multiple rounds of
hearings in front of the US Congress and Senate. The biggest result to so far come out o
f those
hearings, was the lack of alignment among members of the House and Senate, which
sp
ells more
uncertainty for entrepreneurs and managers in the space.
Meanwhile, in October, Xi Jinping publicly labeled blockchain an important strategic focus for
China,
causing a flurry of activity in the market [
9
]. Amongst the most notable events to follow
,
were
(i)
the
4
Data products such as
DIA
, indices from
Bitwise
and
Coinmetrics’
upcoming launches in 2020 are
meaningful steps towards solving the aforementioned problems.
5
Referring to the Harvard endowment participating directly in Blockstack’s Reg A+ $25M fundraise.
6
Currently est
imated at 2.4B people. [
8
]
Author: Elias Simos, Senior Research Analyst at decentralpark.io
4
DPC
:
2019 in review and outlook for 2020
Bundestag issu
ing
a decree enabling German ban
ks to sell and custody crypto starting 2020,
(i
i)
the
ECB announcing a proof
-
of
-
concept for anonymous transactions using central bank backed digital
currency, and more recently
(iii)
a draft bill entitled “Crypto
-
Currency Act of 2020”
being
introduced
in the US House o
f Representatives. Given the sense of urgency that China’s aggressive move seems
to have instilled in its counterparts, we believe that 2020 is going to be a pivotal year for a much
needed regulatory framework that will de
-
risk the emerging asset class.
Bottom
-
up
Even in the face of structural uncertainty, in 2019 the builders have been hard at work and their labour
is already bearing fruit
-
with Ethereum (#2 public blockchain and #1 smart contract platform by
market capitalization) the clear leader in
attracting developer interest. Ethereum has been a hotbed
for developer activity, with Open Finance
7
(or DeFi) use cases finding notable traction. There are now
stable value issuers (e.g.
Maker DAO
), loan facilities (e.g.
Compound
), market makers and exchanges
(e.g.
Uniswap
,
Kyber
) and derivatives facilities (e.g.
Synthetix
) that are fairly well established, while we
are seeing use cases in insurance (
e.g.
Nexus Mutual
), interfaces (e.g.
Zerion
), and payments (e.g.
xDai
)
emerge. These protocols and applications live purely on
-
chai
n, are largely software operated and have
processed multiple hundreds of millions of USD in loans, payments and collateral value in 2019 [
10
].
Shares of the top types of contract methods executed & USD raised fo
r ICOs vs used as collateral in DeFi
-
Source: aleth.io
7
Open Finance is a slew of protocols and applications that replicate traditional financial services with code,
that
at a high level make their delivery more efficient and cost effective.
Author: Elias Simos, Senior Research Analyst at decentralpark.io
5
DPC
:
2019 in review and outlook for 2020
Over the course of 2019, Ethereum became a lot more expressive
8
. There are now more frameworks,
IDEs and mature blocks of value within Ethereum that can be used as references for new applications,
enabling developers to deploy a wider array of features, faster than ever before. Given the
product/market fit that the ca
tegory is showing, Ethereum’s lead in developer mindshare and maturity
of tooling, but also being cognizant of the platform’s scaling and governance limitations , we believe
this to be the space where most value will be created and captured in the next 2
-
3
years. It is indicative
that in an indexing exercise exploring 2019 returns, DeFi has been the standout performer, primarily
driven by the mercurial H2 performance of Synthetix (SNX)
-
a 30x run. Additionally, the money and
finance related indices have st
rongly outperformed all other clusters in 2019
-
a clear indication of
where product/market fit can be found at present and how much it matters to the market.
Dates: Jan 1st, 2019 to Dec 15th, 2019
-
Source: Decentral Park market tracking environment
Some of the areas that we are excited by within the cluster, are synthetic asset solutions that will
reduce collateral ratio requirements, allow for legacy assets (e.g. equities) to be printed on chain and
transacted at a fraction of the cost of traditiona
l brokerages, enable new forms of hedging risk for
crypto native businesses (e.g. hashrate derivatives) and
-
well
-
new forms of leverage. After all, given
the early stage we are currently in, speculation largely remains the main use case.
Concurrently,
in 2019 we saw glimpses of the rise of domain specific chains. Different fee structures
for platform resources and performance limitations and trade
-
offs across different chains create
breeding grounds for fundamentally different applications. As such, whi
le Ethereum has found
traction in use cases that are described by low friction and high transaction value, chains like EOS
-
and more recently WAX
-
are finding traction in high friction and low volume applications (e.g. games)
8
See the chart above for reference. The types of smart contract methods executed on Ethereum have not
only multiplied, but are also more evenly distributed
-
implying that a much wid
er spectrum of functionality
is already possible than a year ago.
Author: Elias Simos, Senior Research Analyst at decentralpark.io
6
DPC
:
2019 in review and outlook for 2020
[
11
]. While
-
in theory
-
Layer 2 solutions
9
can allow for such applications to work on slower chains, it
is hard to
argue that these solutions will provide a more compelling alternative to chains that are
purpose built to withstand heavier loads.
However, most of the aforementioned platforms are still in their infancy (e.g. WAX) and others are yet
to launch (e.g. Tele
gram’s TON), as is the case with the interoperability bridges that will allow value
to frictionlessly traverse through different blockchain ecosystems (e.g. Cosmos). We see the next two
years as the time when these platforms will prove (or disprove) their
viability and pave the way for
immense value creation from 2021 onwards. As such, while we are still big believers in the vision of
the permissionless, and commonly owned and operated, web (Web 3.0), we are also realistic about the
timelines here and will
be pursuing our asset allocation accordingly.
Outlook
for 2020
–
by
Kevin Dough
er
ty
,
Director of Operations and Trading
Institutional adoption is one of the main themes we expect in 2020, and
is structurally bullish. There
was a significant rollout of necessary
i
nstitutional
-
quality infrastructure in 3Q
-
4Q19, with Bakkt
launching on September 23, and Fidelity continuing to expand their
digital
a
ssets
offering. Most
recently, Fidelity recei
ved a license from the New York Department of Financial Services last month
to provide custody and trading services for digital assets to
i
nstitutional investors and individuals.
Fidelity already supports Bitcoin trading and custody and is working to add
other digital assets such
as Ethereum to their platform. And it was just announced that ErisX (another platform founded by
established
Wall Street
firms) is soft launching in late December, and expects to open for client
trading in early January.
The
cryptocurrency Derivatives market is also about to undergo huge infrastructure growth. While
a
robust Bitcoin futures market
has existed
for over a year, the options market has been slow to develop.
LedgerX has been the only
i
nstitutionally acceptable
Bitcoin options trading venue, but it suffers from
low liquidity.
With Bakkt and the Chicago Mercantile Exchange both launching Bitcoin options
markets in 1Q20, this will give
i
nstitutional investors a crucial risk management tool to hedge (and
thus incr
ease) their
exposure
to digital assets
.
This infrastructure rollout sets the stage for
i
nstitutional investor adoption in 2020. Traditional
i
nstitutional money has been slow to arrive, but that is already reflected in current prices and so
9
Referring to a series of protocols that take computational load off
-
chain, using the base layer chain as a
settlement layer that is called upon periodically, drastically reducing the trans
action load the base chain is
exposed to.
Author: Elias Simos, Senior Research Analyst at decentralpark.io
7
DPC
:
2019 in review and outlook for 2020
represents a poten
tial upside catalyst to the market. Indeed,
a
recent survey
by
State Street
-
released
in December
2019
-
regarding
i
nstitutional
i
nvestor plans for digital assets
,
po
sits
that ‘38% of State
Street clients intend to increase their allocation
s of digital assets in 2020’. Ask your hedge fund
manager friends if they personally own cryptocurrencies, and the answer is very likely ‘yes’. Then ask
them if their fund owns cryptocurrencies. The answer is highly likely to be ‘not yet’, largely due t
o
problems around counterparties (trading and custody). With ‘traditional’ markets infrastructure
providers like ICE and Fidelity now offering cryptocurrency services, this is no longer an obstacle.
Another major theme for 2020 that we expect to have a si
gnificant impact on prices is the ‘Bitcoin
halving’ in May 2020. The Bitcoin halving is a
once
-
every
-
4
-
years
programmatic occurrence, and
results in the Bitcoin
block
reward
–
and therefore supply increase
-
being cut by 50%. The two
previous Bitcoin
halvings in November 2012 and July 2016 both coincided with strong bull markets in
the Bitcoin price. While it is folly to develop strong conviction on a data series of only two points
-
especially ones that
occurred
at times when the Bitcoin market struct
ure was very different than it is
today
-
the rationale that a structural reduction in supply increase is inherently price positive is sound.
Interestingly, the cryptocurrency market has become much less bullish on the consequences of the
Bitcoin halving i
n recent weeks. Earlier this year it was almost universally considered that the halving
would be a bullish trigger, and the only real debate was over ‘how much it would increase the Bitcoin
price’, and not whether or not it would
result
in higher prices
. What
is the reasoning behind this
recent shift to bearish expectations? None, really. There has just been a shift towards proclaiming
that ‘it is already priced in’. In our view, this reflects the often manic depressive nature of the current
c
rypto
ass
et
market structure, which is still unfortunately dominated by speculators with a very short
term outlook and often little financial markets experience outside of cryptocurrencies, and whose
frequently shifting structural views are heavily influenced by the m
ost recent price action. Indeed,
the ‘Bitcoin Fear and Greed’
i
ndex
–
a useful quantitative indicator of market sentiment
-
has been
pegged in the ‘Extreme Fear’ zone for the last month. Previous prolonged instances of ‘Extreme Fear’
readings like the cu
rrent one have consistently preceded strong rallies in the Bitcoin price.
These short
-
term price swings that appear disconnected from fundamentals are unfortunately typical
for speculator dominated early stage asset classes in general. In addition, the re
cent downward price
swing was exacerbated by the unwind of a more than $2B Ponzi scheme in China called PlusToken.
Participation in the scheme was funded using cryptocurrencies (mainly Bitcoin and Ethereum), and
much of these have been aggressively sold i
n the last few months after Chinese authorities arrested
some (but not all) of the organizers of the scheme. With on
-
chain analytics, we can observe the
affected tokens moving between wallets, and see the liquidation taking place. This has clearly
weighe
d on prices recently.
Author: Elias Simos, Senior Research Analyst at decentralpark.io
8
DPC
:
2019 in review and outlook for 2020
But as the impact of these ‘one
-
off’ PlusToken sales fades, the increased participation of
i
nstitutional
i
nvestors that we expect in cryptocurrencies in 2020 should have three big implications:
1.
Fundamentals should be a more impor
tant factor on prices
2.
Volatility should structurally fall
3.
Valuations should increase
These have historically been the results when ‘traditional’
i
nstitutional
i
nvestors enter an asset class,
and were the pattern seen repeatedly in
e
merging
m
arkets and
c
ommodities
.
The bottom line is that while price action in cryptocurrencies has been p
ainful since August 2019, the
market is well set up for a rally in the short to medium term due to the
factors discussed above:
●
Strong continuing development and investment across the cryptocurrency space
●
Increased Institutional investor participation
●
Reduction/end of ‘one
-
off’ PlusToken liquidation
●
Reversal of current ‘Extreme Fear’ sentiment
●
Bitcoin halving
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