Reflecting on 2020, I have a hard time thinking about another year in recent decades, with so many highs and lows of all time.
From the COVID-19 pandemic ravaging the global population to record forest fires in the western United States and countless other calamities, the world this year has often appeared figuratively and literally on fire.
This post is part of CoinDesk’s year 2020 under review – a collection of opinion pieces, essays and interviews about the year in cryptography and beyond. Garrick Hileman is head of research at Blockchain.com and a visiting researcher at the London School of Economics. Current research interests include governance, digital entrepreneurship, financial repression and measuring the adoption of crypto assets.
Completely juxtaposed to this death and destruction are edifying scenes of pandemic-stricken communities gathering and celebrating frontline workers, innovations like surprisingly fast vaccine development and the first space launch of human flight with privately funded reusable rocket and the red hot-markets and crypto-assets space, the focus of this article.
In a few years’ time, I believe we will look at 2020 as a critical tipping point in the broader adoption of crypto-assets and blockchain technology.
From the long-awaited and expected arrival of the adoption of institutional cryptography, to the acceleration of the digital currency and payments stimulated by the pandemic, to greater regulatory clarity in important jurisdictions such as the USA, 2020 proved, in my view, to be cryptographic even better.
As we move forward in 2021, what can we expect from cryptography?
Two macro forces that have driven the rise this year of crypto assets like bitcoin to another new historic record show little sign of slowing down.
1. Reduced government spending and money printing
Arguably, the biggest factor driving the increase in the valuations and adoption of crypto-assets is the concern with government spending and monetary stimulus. In fact, debt levels were already worrying before the pandemic, with many (including myself) sounding the alarm about world war public debt levels, sans World War.
As justified as the generally bipartisan pandemic stimulus is, the simple mathematical reality is that when governments and central banks suppress interest rates and increase the money supply, the value of relatively scarce assets often increases.
Simply put, more fiat money and debt chasing a finite number of things (for example, bitcoin) equates to a higher price for those things.
In the cryptographic 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 around its “digital gold” investment thesis.
In fact, there are some recent indications that, along with rising inflation fears, some investors are spinning part of their bitcoin gold portfolio allocation. The continuation of this trend would provide strong support for a further appreciation of the price of bitcoin.
See also: US dollar worsening, inflation metrics bode well for Bitcoin’s continued recovery
With the development of several promising vaccines, the COVID-19 pandemic and the damaging economic constraints that accompany it are expected to start easing sometime in 2021. However, an unprecedented global debt will remain, creating concerns about debt sustainability in the future. and a favorable wind for active cryptographic algorithms with restricted supply.
2. US-China economic and geopolitical tension
Even with the impending shift in US presidential administrations, geopolitical and strategic competition between the two world superpowers – China and the United States – is unlikely to decrease.
What this evolving conflict of superpowers totally means for cryptography is something we are just beginning to understand, but some likely results include:
All of these developments are largely positive for relatively decentralized crypto assets such as bitcoin and ether.
While central bank digital currencies can pose challenges for some more centralized crypto asset networks (eg, stablecoins) in the form of increased competition and regulatory scrutiny, the additional digitization of fiat currency and payments is more complementary than competitive for crypto assets decentralized like bitcoin, which will have less design overlap. For example, the central bank’s digital currencies will not present a finite offer like the hardcover of 21 million bitcoin coins, and it is also extremely unlikely that they will have the same degree of censorship resistance and confidence minimization as bitcoin.
A divided global governance framework means that we are unlikely to see the kind of widespread and coordinated regulatory crackdown that hedge fund manager Ray Dalio and others have suggested will occur if cryptography gets “too big”. And a multipolar global financial system, divided into the spheres of influence of the U.S. and China, undoubtedly creates space and motivation for more neutral assets and financial infrastructure based on blockchain.
Money historian Niall Ferguson (my PhD supervisor) also recently argued that part of the reason why the U.S. should adopt bitcoin and crypto assets is to support a more open and privacy-conscious financial system compared to the more centralized system actively promoted by China through its currency central bank’s digital currency, the DCEP.
There is also the question of who controls or influences the biggest public blockchains, like Bitcoin and Ethereum. Brian Brooks, US Currency Controller recently in office worried about China’s overwhelming influence on cryptocurrencies like bitcoin, through its dominant share in the power of computational mining, securing blockchain networks. This concern about the Chinese influence on Bitcoin and Ethereum was also recently echoed by Ripple in his response to the lawsuit recently filed by the Securities and Exchange Commission.
The growing support for cryptography among those concerned with democratic values and the global balance of power may mean that we will also soon see one of the most positive developments for cryptographic assets: governments having a direct role in supporting and even owning cryptographic assets.
While admittedly speculative, it is possible to imagine the U.S. and China gaining from the more complete adoption of cryptographic assets like bitcoin.
As I argued earlier, a rising financial superpower like China could potentially jump up the reserve asset leaderboards cheaply, actively acquiring bitcoin. FOMO is not restricted to private sector market participants, and the first nation-states will gain the most in any race to acquire a new reserve asset. As an American, my hope is that the United States will think twice before rushing to auction its latest seizure of nearly 70,000 bitcoin law enforcement connected to the closed Silk Road market.
See also: Mable Jiang – Bridging Cultural Gaps in 2021: Crypto in China and the US
At the same time, the United States and other democratic countries may increasingly see blockchain networks without permission and relatively decentralized as similar to the open Internet: a powerful tool in promoting freedom and the values of open society.
Post-pandemic acceleration
Although the pandemic and its punitive economic and social restrictions will end, I hope, next year, there is little reason to believe that the acceleration in the adoption of cryptography that we are witnessing at the moment will end with it.
This year consolidated the notion that crypto assets will not only not disappear, but will also be part of our financial lives in the future. As we close a very difficult and historic 2020, the future has never looked brighter for the ownership and use of bitcoins and crypto-assets.
