Wrapping up 2020, the most exciting year in digital assets yet
There are so many news these days that any article on digital assets will immediately be outdated. But I give it a shot anyways, as I am hugely excited about all the developments in this space.
I think there can no longer be any doubt that digital assets are here to stay. Bitcoin has just beaten its former all-time high, the dominoes of institutional adoption are falling, central banks are launching CBDC initiatives, and corporates left and right are getting involved.
What were once two separate financial markets (the traditional and the crypto), are increasingly becoming one.
Below I summarize the key developments leading to the further normalization of digital assets while also providing an updated version of the Institutional Digital Assets Capital Markets Landscape.
- Coinbase is going public! In a major step for the entire digital assets ecosystem, one of the key players in digital assets has filed to go public. This will be a major validation point for digital assets overall and make a native crypto company available to public investors.
- Traditional hedge fund (managers) are dipping their toes into crypto. Over the last few months a growing number of well-known and respected hedge fund managers have revealed their exposure to bitcoin, or are filing for approval to build it in the future. Among them are Paul Tudor Jones, Stan Druckenmiller and the infamous Anthony Scaramucci (link).
- Listed companies adopt bitcoin as a treasury reserve. The most bullish on that front might be MicroStrategy, which accumulated $425m worth of bitcoin over Aug- and Sep-20. Square followed a month later with a $50m investment in bitcoin (link).
- Banks are allowed to become crypto custodians. In a strange turn of events, banks that a few months ago were pulling the plug on any clients that were even remotely connected to crypto (Bitwala being a case in point), are now suddenly scrambling to become crypto custodians. Since the German regulator included digital assets in its application of the AML5 Directive, no less than 40 banks have rushed to apply for a license. A few months later, the US banking regulator OCC followed suit. It is quite amusing to watch this institutional FOMO unfold.
- DeFi is dramatically increasing the utility of digital assets. This summer saw the rise of DeFi from concept to reality. DeFi is still much at the PoC stage, similar to the whole crypto space in 2017, but it is proving one thing: the digital assets space is not only about speculation, it is a new, global, and decentralized financial market. This is easily the most exciting trend as it effectively creates a new use case and hence brings true utility to the digital assets ecosystem. We are especially proud that our portfolio company Curv is the first player globally to enable institutional investors access to this emerging market in partnership with MetaMask (link).
- Stablecoins are hot. Stablecoins are another use case of digital assets that will drive utility. Central banks are initiating CBDC (central bank digital currency, e.g. a digital Euro) pilots e.g. in China, France and with the European Central Bank. Private currencies are also gaining in popularity (see e.g. USDC by Circle) and will penetrate the mainstream even further when the Facebook-led Diem (fka Libra) launches. Soon, stablecoins will be a native feature of our bank accounts, and we will use them to pay merchants, friends or send them across borders with ease. VISA has understood the implications and is already seeking to partner with the space to process stablecoins.
See below my updated Institutional Digital Assets Capital Markets Landscape. What has changed since I published the first iteration in May this year?
- First signs of consolidation. We are beginning to see a first wave of acquisitions in the market with both incumbents and startups on the acquirer side. SBI just announced their acquisition of liquidity provider B2C2, and PayPal is rumored to be in the process of taking over institutional custodian BitGo. On the startup side, our portfolio company eToro_Official has acquired Firmo to enable asset tokenization on its platform. Coinbase acquired Tagomi to bolster its institutional product range. Gemini acquired Nifty Gateway to expand into NFTs. Genesis acquired custodian Vo1t to broaden its prime brokerage capabilities.
- More traditional institutions are joining the ecosystem. This trend is most visible on the institutional investment and crypto custody sides (as discussed above). But traditional institutions are also moving into data, banking services and fund issuing, and as with SBI now (through their B2C2 acquisition), into market making.
- Tokenization platforms are scrambling to be ready for when asset tokenization takes off at scale. Among the players in the top-left bucket, however, many have still not seen significant volume. The key asset this year has clearly been bitcoin, and it will likely remain the top digital asset (in a capital markets sense) for the foreseeable future.
The digital asset capital market has made significant strides this year. Bitcoin has firmly established itself as an asset and continues to attract institutional interest. Hedge funds these days ask their LPs for permission to invest in digital assets. Soon, LPs will be asking their GPs why they are not exposed to them.
I remain highly excited about the potential of this space and I am looking forward to the future. If you are building a company and want to talk, feel free to reach out.
