2020: Exploding Derivatives and Institutions Offering Digital Asset Management Services

This article originally appeared in The Daily Hodl.

It may come as a surprise, but it is likely that history will show that 2019 was a turning point for cryptocurrency markets.

In a year when Facebook announced Libra; the Bitcoin price rose to over $10,000 again — before settling at $7,000; and big household names like Fidelity and the International Monetary Fund embraced the crypto phenomenon with the former launching custody services and the latter publishing an important paper on stablecoins; 2019 will be looked on as the year when markets finally went from being speculative to rational, helped by deeper liquidity, a wider range of investors, and the emergence of crypto derivatives.

As we head into a new year, we believe that the momentum from 2019 will carry into 2020 and that the next 12 months will see more action by regulators to manage the growth of crypto, more action from traditional financial institutions to embrace the opportunities offered by crypto, and an increased positive performance for crypto’s biggest currency: Bitcoin (BTC).

Our predictions for 2020

Following the advances of regulations made by Malta, we predict that the United Kingdom, Hong Kong and Singapore will emerge as the pre-eminent crypto centers with the UK’s Financial Conduct Authority, Hong Kong’s Securities & Futures Commission and the Monetary Authority of Singapore all publishing comprehensive regulations for the management of crypto exchanges, as well as digital assets.

The comprehensive regulations will give these three jurisdictions advantages for attracting capital and talent. These are also jurisdictions where crypto is growing the fastest: China, East and South East Asia and Europe. The US and Japan also offer crypto regulation in varying degrees, but growth is most prevalent in Asia, where a growing affluent class is looking to diversify its investment portfolios.

After years of preparation, at least three major household name financial institutions will announce they are offering crypto services to customers next year, signaling the manifestation of digital assets as an investment instrument. We know of several large financial institutions which, for reasons of confidentiality we cannot name, are actively exploring how they can use their platforms, technology and infrastructure to offer crypto investing services to their existing customer base.

All report how they are receiving increasing reverse inquiry from their clients about how they can safely invest in crypto, and they are evaluating different solutions to meet this need. More importantly, many report that they do not want to be caught out, as many were in 2017, when cryptocurrency prices spiked and they were deluged with demand. In 2020, several of these institutions will announce they are ready.

With this renewed interest in crypto, we believe prices will rise. However in 2020, the increasing demand for crypto will combine with the so-called ‘halvening’ for BTC. This is when the rewards paid for mining BTC will be cut in half. Given that miners’ rewards are paid in BTC, the slower supply of new BTC into the market combined with increasing demand mean that even with the halvening well-baked into the market, price appreciation should still eventuate. We believe that, notwithstanding continued market volatility, BTC will trade across $15,000.

Finally, the crypto derivatives market size will double in 2020, jumping from a size of $5–10 billion per day to $10–20 billion per day, considering the rising interest from professional investors, the ‘halvening’ of BTC and the increased regulatory clarity around the asset class. As has been seen in so many traditional markets, with increasing sophistication and the need to find protection against adverse price movements, derivatives play a hugely important role and their popularity in 2019 is only set to grow further in 2020.

Observations from the past year in the crypto landscape

Over the past year, the contours of a regulatory framework around cryptocurrency have been coming more into focus. Examples include the Financial Action Task Force’s ‘Travel Rule’, the UK’s Financial Conduct Authority’s final guidance on regulating crypto, the International Monetary Fund’s paper on the future of digital money, the proliferation of debates around Libra and Bitcoin in the US Senate, and other statements by regulators across different jurisdictions. The clarification of regulation has only served to encourage digital asset investment flows.

We’ve also seen high-profile custody service providers coming into the crypto space, as well as a new level of professionalism arise around security concerns.

News that mainstream players like Facebook and the People’s Bank of China are actively launching cryptocurrency projects signal increased adoption .

What are the concerns and challenges for institutional investors, and what are the predictions for 2020 ?

Looking at the past five years, cycles of hype and fear have dictated market sentiment, and cryptocurrency as a consequence has largely been used for speculation and unfortunately bears a reputation among the general public for poor controls, lack of market surveillance and lax ‘know your client’ and ‘anti-money laundering’ processes.

One solution for elevating the discussion is providing easily accessible education on distributed ledger technology and its associated assets. Also needed is greater regulatory clarity , more robust custodial services , and better performing exchanges — fit for sophisticated participants — that can absorb deep liquidity, high order volumes, and guarantee market integrity.

Increasingly clarified regulation, accelerated adoption, institutional participation, and the upcoming halvening contribute to a brighter year for Bitcon in 2020.

In addition, innovation in the crypto derivatives market to improve price discovery, and a strong shift towards security tokens and other crypto asset types will provide added momentum for asset prices.

Digital assets market vs. stock market

The onset of digital assets as an investment is irreversible. The innovation brought about by the development of blockchain technology as an independent and immutable ledger is incredibly significant for enabling investors to access different assets.

Stocks, bonds and even information will eventually move on to the blockchain, to improve efficiency, determine irrefutable ownership, and optimize security.

We also need to remember that the new generations that grow up in today’s world are inherently more familiar with digital culture and much more comfortable engaging with digital assets and other innovations in this space.

It has been estimated by recent research from Grayscale that over the coming 25 years we will see $68 trillion in generational wealth change hands, and it will be interesting to see how this new generation will invest their wealth and how much of that capital will flow into digital assets.

The future for digital assets, as a safe, regulated and transparent investment class, as a consequence, looks very positive

We hope you share our sense of optimism and wish you and all your family members a merry festive season!

Thor Chan
Chief Executive Officer of AAX

Thor was among the first to join AAX and is the mastermind behind the company’s product development strategy. His expertise reaches across all operations and is a driving force behind the team’s success. His experience includes building global order management systems, global settlement systems, and low-latency trading platforms for professional traders.

He was previously licensed in Hong Kong to manage equities and derivatives brokerage and trading operations. He’s held various roles, including Deputy COO at FDT Group, and product management roles at App Annie, Microsoft, Publicis, and HSBC.