The Journey of Blockchain PART 2:
2020: Blochain & The Return of the Bull Market
The impact of Covid-19 on the global economy
What followed on from the end of 2019 was relative stability, with some slight pessimism. BTC and associated cryptocurrencies had recovered slightly, however, still not reached the highs of 2017. Cryptocurrencies such as BTC and ETH were attempting to shake a prolonged price slump off the back of the 2017 bull run, with liquidity still low in the markets, and institutional investors still well down on prior figures. However, the unexpected occurred. Coronavirus, an infectious disease caused by the SARS-CoV-2 virus, was able to sweep the globe, reaching almost every country in the world.
The virus spread left national economies and businesses in ruin, as governments were struggling to prevent the spread through numerous lockdown measures. Many people lost their jobs, with unemployment rates increasing across all major economies. See the excerpt from the IMF below:
With the coronavirus pandemic hitting unexpectedly, we saw the biggest drop-off in economic output since the Great Depression in the 1930s and the majority of countries were now in recession. The IMF estimated that the global economy shrunk 4.4% in 2020. See the illustration of real GDP growth across the year per the IMF:
In response, central banks in many countries slashed interest rates and printed ridiculous amounts of money (especially the US Federal Reserve, the most it has printed in its 107-year history). It is said that more than 20% of all dollars in circulation were printed in 2020. Additionally, governments began to hand out a plethora of stimulus packages to its citizens, as well as millions of unemployed people being placed in government-supported job retention schemes as sectors of the economy such as hospitality and tourism were at a standstill. We saw this in Australia with both “Job Keeper” and “Job Seeker”. There was also a work from home and stay at home factor, where individuals globally had more time, more money and more interest in alternative forms of investment, one of those being cryptocurrency. A combination of these factors and quantitative easing meant that both stocks and Bitcoin were boosted, as investments in cryptocurrency (mainly BTC) are considered to be used as a hedge against inflation, as its finite supply means that it is deflationary in nature. With such demand for BTC, the price across the year reacted very positively.
Moreover, with covid-19 running riot, unemployment numbers were rising, trillions of dollars of stimulus were being injected into the economy, and investors were turning to cryptocurrency, it was the first time in blockchain technology’s short history that financial intermediaries such as insurance firms, banks, money managers and other entities also really began to embrace both cryptocurrencies and digital assets.
Subsequent growth of Bitcoin & Ethereum and further institutional investment
Between January and September 2020, we saw that BTC was pushing between $7,200 to as high as $12,000, ETH was getting from $130 to as high as $440 and XRP was still trucking along from its incredible 2017 highs, pushing from $0.19 to around $0.30. The markets were able to rebound to the same valuations of 2017, with the total market cap of the cryptocurrency markets moving up to around $800 billion, moving up remarkably from the measly $185 billion valuation at the start of that calendar year. The cryptocurrency market was finally coming out of the long winter and an optimistic future was on the horizon.
As a result, the cryptocurrency markets also saw a resurgence of institutional investment once again. It all began in August of 2020 when MicroStrategy CEO, Michael Saylor, announced that they were going to make a $250 million long-term investment in BTC, becoming the first CEO of a publicly listed company to make a long-term commitment and investment in Bitcoin.
Grayscale, a leading digital currency investor, also declared that 2020 was the year of Bitcoin institutional investing. According to their reports, they experienced “unprecedented investor demand” that is “4 times the $1.2 billion cumulative inflow into the products from 2013-2019”. Grayscale CEO, Michael Sonnenshein exclaimed “we saw a meaningful acceleration of institutional participation. There’s no longer professional risk of investing in the digital currency asset class – there’s probably more career risk in not paying attention to it”. Subsequently, Grayscale’s commitment to BTC paid incredible dividends, beginning the year with $2.0 billion in assets under management and ending 2020 with $20.2 billion. The inevitable inflow of institutional investing was a key reason for BTCs growth throughout 2020, with reports stating that 87% of Bitcoin investments in 2020 came from institutional investors dominated by asset managers.
On top of BTC’s wild run throughout 2020, Ethereum by year’s end was able to reach around $740, almost a 500% increase throughout the calendar year, edging closer and closer to its 2017 all time high. There was a massive shift in accessibility due to individuals around the world either being locked down, working from home, or simply staying at home to avoid the virus. This spurred new investment into much of decentralised finance, with the deFi sector growing from $1 billion to $14 billion in “locked” assets, increasing the value exponentially of all tokens associated with the decentralised finance platform.
The first phase of Ethereum 2.0 was also launched in December of 2020, creating additional buyer pressure surrounding the excitement of Ethereum’s impending transition from proof-of-work to proof-of-stake in the network’s next big upgrade. Ethereum 2.0 would essentially allow staking, meaning investors could earn additional yield simply by holding ETH to support the operations on the blockchain.
The continued exponential growth of decentralised finance
Additionally, off the back of Ethereum launching the first phase of Ethereum 2.0 and decentralised finance growing immensely in popularity in 2020, proof-of-stake blockchain technology in general became far more prominent as well. Although it only represented around 15% of the cryptocurrency market at the time, it was responsible for driving significant growth with users being incentivised to “lock” (stake) their coins into the network, ensuring long term operability, whilst enjoying handsome returns. Four of the top nine cryptocurrency assets by market cap in 2020 were on the path to proof-of-stake, up from zero at the start of the year. We saw an incredible growth in popular cryptocurrencies such as Polkadot, Solana and Cardano.
Polkadot (DOT) was created by Dr. Gavin Wood, one of the co-founders of Ethereum and the inventor of the solidity smart contract language. DOT was constructed to “connect private and consortium chains, public and permissionless networks, oracles, and future technologies that are yet to be created”. With decentralised finance at the forefront of cryptocurrency throughout 2020, a cryptocurrency such as DOT saw such a meteoric rise in price that by the end of 2020, it was already a top 5 cryptocurrency with an astonishing market capitalisation of $8.3 billion.
2020 also gave rise to increasing usage and creation of decentralised exchanges (DEXs). Due to lower transaction fees when compared to centralised exchanges, lower counterparty risk, greater privacy (minimal KYC), and financial inclusiveness, DEXs increased in popularity. In September of 2020, there was a volume of $28.9 billion handled, up from $644 million in January of 2020 and $40 million in January of 2019, cementing itself as a viable alternative to centralised cryptocurrency exchanges. Moreover, the growing demand to trade new ERC20 tokens off the back of a booming deFi sector built on the Ethereum network was a key reason for the extensive volume growth.
Top exchanges Uniswap, Sushiswap, Curve and 0x accounted for over 90% of all DEX volume, with Uniswap accounting for 47.7% of market share according to Dune Analytics. The Uniswap clone, Sushiswap, accounted for the second largest amount of volume. Uniswap has been absolutely crucial in the rising growth and usage of DEXs, allowing users to swap in and out of ERC-20 tokens. It paved the way for extensive growth all throughout 2020, before accelerated growth all throughout 2021, as more and more users flocked to take advantage of decentralised finance.
On top of that, Uniswap also popularised airdrops. Airdrops are usually used as marketing tactics, using free distributions of cryptocurrency tokens as a means of driving awareness and building communities quickly, rewarding users and attracting investments.
Being the world’s most popular DEX, Uniswap airdropped its native token, UNI, to anyone who had used the exchange before September 1, 2020. In doing so, users could receive up to 400 UNI tokens for free, with the price ranging between $2 and $4, allowing them to sell the given token for a handy free profit, however, with UNI now worth $10 at the time of writing, HODLers are even more so handsomely rewarded.
This allowed for other platforms to follow in the footsteps of Uniswap, producing airdrops themselves. 1inch in December of 2020 aidropped 90 million 1INCH tokens to more than 55k addresses at a price of roughly $2.7.
XRP unfortunately went backwards
In contrast to the growth of Ethereum, Bitcoin, decentralised finance and associated dApps in 2020, the story for Ripple (XRP) was a lot different. Whilst becoming the biggest hit throughout the 2017 boom, XRP lost much of its value throughout the 2018 bear market, but was able to maintain a steady price throughout 2019 and 2020 along with both BTC and ETH. However, throughout 2020, BTC saw an increase from $130 billion market cap to $540 billion market capitalisation, ETH saw an increase from $14 billion market capitalisation to $84 billion market capitalisation, and XRP only saw an increase from $8.3 billion market capitalisation to $9.9 billion market capitalisation, losing its long standing position as the third most popular cryptocurrency in market capitalisation size to Tether.
The reason for XRP not enjoying the parabolic growth in 2020 that BTC, ETH and most other top cryptocurrencies did is due to the SEC filing a legal complaint against Ripple in November 2020. Such legal action was supposedly for allegedly selling unregistered securities, with the SEC claiming that XRP was indeed a commodity, not a security, as it was being distributed in a centralised manner by Ripple Labs as well as not being adopted by financial institutions for its advertised use cases. After reaching a positive pricing of $0.70 in late 2020, the legal action brought forward by the SEC caused the XRP price to plummet back down to $0.20. To add on top of this, popular exchanges such as Coinbase have delisted XRP. It is unknown whether Ripple will successfully overcome the SEC lawsuit. Only time will tell.
The downfalls of cryptocurrency and blockchain in 2020
Whilst 2020 was a fine year for cryptocurrency investing and the advancement of blockchain technology, like prior years, there were some downfalls associated mainly with hackings and illegal activities.
Popular decentralised exchange, KuCoin, was hacked on the 26th of September, 2020. The Singapore-based cryptocurrency exchange stored a number of assets in hot software wallets, rather than cold wallets. As a result, KuCoin had said hot wallets were drained of BTC, ETH and ERC-20 tokens, with losses accumulating to over $150 million, with some reports suggesting $275 million, however the real figure is unknown. KuCoin is known to be one of the most popular exchanges for the buying and selling of alt coins.
Moreover, illegal activities in cryptocurrency were still rife throughout 2020, with subsequent law enforcement intervention. In February, an Ohio man was arrested for running the Helix Bitcoin mixing service, laundering over $300 million. In June, New Zealand police froze $90 million in BTC-e assets as part of an ongoing money laundering investigation. In November, the US Justice Departments seized roughly $1 billion in BTC, said to be from the now-defunct Silk Road marketplace. In December, popular project Compounder Finance, a decentralised finance project, performed a “rug pull”, allegedly stealing over $11 million from investors.
Irrespective of these events, the return of the bull market and true explosion came in the latter months of 2020. Between the 1st of September and the 31st of December, BTC almost tripled in price, going from roughly $12,000 to $29,000 and ETH almost doubled in price, reaching $730 from $480. Off the back of the worsening spread of covid-19, increased lockdowns globally, rising inflation and government stimulus and the increased use and accessibility of decentralised finance, the price trend within the cryptocurrency market began to boom once again heading into 2021.
Stay tuned for Part 3! 2021: The Explosion of Web 3.0, Metaverse, and NFTs and the Subsequent Pullback.
