Crypto Long & Short: Looking Back on a Monumental Year

Four guest experts share their biggest insights from 2020 and what they mean for 2021

January 3, 2020 Weekly insights, news and analysis for the professional investor Sponsored By: By Noelle Acheson Director of Research If you were forwarded this newsletter and would like to receive it, sign up here.  PRICES (01/03/21 @ 8 a.m. UTC):  BTC - $34,114.91 | ETH - $810.68 Hi everyone, and Happy New Year!!   Well, we made it through 2020. Now, time to face 2021. Lacking a crystal ball, the only prediction I can confidently make is that the changes seen in 2020 – in capital markets, the economy, portfolio strategies, regulatory reach and so much more – will continue to play out in an ever-larger arena, and that all of these changes will impact the crypto markets in some way.   In other words, if you thought 2020 was an impactful year for crypto assets, I think you'll find 2021 even more interesting.   Today is Bitcoin's birthday, the anniversary of the creation of the first block 12 years ago. To celebrate it, the cryptocurrency went on a tear yesterday, smashing through successive milestone levels, and as I type, it is over $34,000. Just over a month ago, it was half that.   For the first Crypto Long & Short newsletter of 2021, we want to share with you insight from some of the industry's top analysts. We asked analysts from Kaiko, Skew, IntoTheBlock and Arcane Crypto to share their favorite chart of 2020, and why they find it so interesting.   You can see more of Kaiko's and Arcane Crypto's work in our Research Hub.   We'll be back to our usual format next week.   Until then, read on …   – Noelle   SPONSORED BY CRYPTO.COM Introducing the Crypto.com Exchange VIP Program, where VIP retail clients enjoy exclusive trading incentives and perks. Be rewarded with reduced maker/taker fees, dedicated VIP account manager and API tech support. Receive exclusive VIP swag alongside many other perks. Applications are open, get in touch with us - vip@crypto.com. The Briefing The first Crypto Long & Short of 2021 has a different format: Instead of the usual article, I've asked some leading industry analysts to share their favorite charts with you. The depth and quality of metrics available to market observers has grown by leaps and bounds this year, and the work of these analysts and others goes a long way toward helping investors to not only understand the crypto ecosystem better, but also to appreciate how different and fascinating the assets and their markets are. Click on the below links to find out more about these analysts' work and the data they offer.    Clara Medalie, Business Development and Strategy at Kaiko The March market crash will go down in history as one of the steepest and most rapid sell-offs to ever sweep cryptocurrency markets. Over the course of an hour, bitcoin's price plummeted thousands of dollars and order book liquidity all but evaporated. This chart shows the sum of all bids and asks placed on Coinbase's BTC-USD order book before, during and after the first price crash. We can observe that when the crash began around 10:30am, the quantity of orders surrounding the midprice plummeted, forcing a liquidity crisis that perpetuated the steep fall in price.   This chart is one of my favorites because it demonstrates the important role that market makers play in creating and maintaining liquidity in cryptocurrency markets. Ultimately, the March crash proved that the price of an asset is often less a reflection of the "true value at a point in time assigned through the process of market-based price discovery" and more a product of relentless feedback loops triggered by automatic liquidations and decimated order book depth. As cryptocurrency markets mature and order book liquidity improves, we can expect the magnitude and frequency of such price crashes to decrease. Source: Kaiko   Lucas Outumuro, Senior Analyst at IntoTheBlock   IntoTheBlock categorizes on-chain transfers of over $100,000 as "large transactions." The aggregate volume in large transactions serves as a proxy to institutional investors' and high net worth individuals' transaction activity.    Large transaction volume for Bitcoin has grown considerably in 2020 along with institutional interest. Comparing the average large transaction volume on the Bitcoin blockchain for December 2020 relative to December 2019, we observe it has more than quadrupled from an average of $7 billion per day to over $30 billion.  Source: IntoTheBlock   Emmanuel Goh, CEO of skew.com   In 2020, institutions finally embraced bitcoin but not always in the way one would expect. For instance, sophisticated investors such as hedge funds have been looking at capturing spreads by looking at the inefficiencies of this nascent market. This has translated in particular to leveraged funds positioning of CME bitcoin futures making new record shorts almost on a weekly basis in the last quarter of 2020. Source: skew.com   Bendik Norheim Schei, Head of Research at Arcane Crypto   The DeFi sector saw moderate adoption during the first half of the year, with lending protocols dominating the space. At the time, the total value locked in DeFi was relatively stable, for the most part ranging between $700m and $1 billion. Then, on June 16, Compound launched its governance token. The interest in the sector then exploded (quite literally), as yield farming attracted many new participants into the space. The total value locked in DeFi has increased from $670m to $14.5B in 2020, a growth of 2,100%. By December, 1 million unique addresses were affiliated with DeFi, a 10x growth from January. Both lending platforms and decentralized exchanges (DEXes) have seen particularly strong growth this year, while derivatives platforms have seen a more moderate (albeit strong) growth. 2021 prediction: DeFi derivatives platforms will see a more substantial growth, with stricter regulations on the centralized derivatives market leading traders to alternative markets. Source: Arcane Crypto Anyone know what's going on yet?   Instead of trying to recap the annual or even the weekly performance in macro markets (because many will have done that in much more depth and with more perspective than I could), I'll leave you with an awesome summary overheard coming from the mouth of a particularly observant kid, when asked how he would sum up 2020:   "It's like when you have to cross the road, and you carefully look to the right and then to the left, and then you get run over by a submarine."   I will, however, share with you our usual chart of relative performances, because, well …   For an insightful rundown of bitcoin market developments in 2020, check out my colleague Bradley Keoun's piece. Introducing Valid Points, a CoinDesk Newsletter   CoinDesk is staking 32 ETH in Ethereum's historic upgrade, and research analyst Christine Kim and tech reporter Will Foxley are breaking down Ethereum 2.0 and its sweeping impacts on crypto markets, weekly. Using data direct from CoinDesk's own Eth 2 validator node, Valid Points features original insights about what the future of Ethereum looks like for industry stakeholders and investors.    The Valid Points newsletter launched with Eth 2.0's launch. Learn why CoinDesk staked 32 ETH in the new blockchain protocol and follow our journey and insights by subscribing to Valid Points here. Chain Links Anthony Scaramucci's SkyBridge Capital has already invested $182 million in bitcoin. TAKEAWAY: The bitcoin fund's brochure lists increasing adoption, lower risk, low interest rates and "unprecedented money printing" as some of the main reasons for bitcoin's growing respectability. A quote from the brochure: "Bitcoin is digital gold. It is better at being gold than gold."   BlackRock is seeking to hire a vice president to help build demand for the company's crypto-related offerings. TAKEAWAY: The gotcha here is that BlackRock is planning crypto products! That would definitely signal mainstream institutional acceptance – it's unlikely that BlackRock would take this step unless it had already seen some demand.   Fund manager VanEck has submitted an application to the U.S. Securities and Exchange Commission (SEC) for a bitcoin exchange-traded fund. TAKEAWAY: VanEck has previously and unsuccessfully proposed ETFs, withdrawing its most recent application in September 2019. This latest attempt signals that the firm believes the environment is more favorable now than in the recent past, and we are likely to see other ETF managers submit further proposals in the coming months.   Earlier this week, the Chicago Mercantile Exchange (CME) was briefly the largest bitcoin futures exchange by open interest, which reached $1.66 billion. TAKEAWAY: This is, in my view, the clearest signal that institutional interest in bitcoin is growing. At the beginning of 2020, the CME bitcoin futures open interest ranked fifth, well behind BitMEX, OKEx and Huobi. The daily volumes in the CME's bitcoin futures, however, are well below the exchange's Asian counterparts, which implies less trading and more strategic positioning than in crypto derivative exchanges outside the U.S. Gazpromneft, the oil subsidiary of Russia's natural gas giant Gazprom, has opened a venue for cryptocurrency mining on one of its oil drilling sites in Siberia. TAKEAWAY: So many threads to pull on here: 1) oil and gas producers seeing cryptocurrency mining as a diversification source; 2) the geographical spread of crypto mining activity; 3) Gazprom is a state-owned enterprise, getting involved (albeit indirectly) in cryptocurrency mining.   Canadian augmented reality (AR) company NexTech AR (NTAR) plans to use its treasury funds to buy $2 million worth of bitcoin for "capital diversification." TAKEAWAY: This is not as big a bet as MicroStrategy (MSTR) has made this year, since this amount is only approximately 15% of the available cash on hand at the end of Q3. The firm's CEO said that he sees bitcoin as having more long-term appreciation potential than simply holding cash. We will most likely see more announcements like this over the coming months.   National Football League player Russell Okung will get half of his $13 million annual salary in bitcoin, via crypto startup Zap, whose Strike product enables traditional paychecks to be converted to bitcoin. TAKEAWAY: Apart from the high-profile publicity this gives bitcoin (and we are likely to see more athletes making crypto-related announcements over the coming months), it is also a sign of the widening breadth of products for a market beyond institutions. According to Zap's CEO, Strike can now be used as a checking account through partnerships with two yet-to-be-named banks. What's more, Okung's advocacy for bitcoin is not news – he launched the bitcoinis project which writes and hosts meetups about cryptocurrency – so we can expect to see more buzz-generating public comments next year.   For those of us working in the industry, it's been fun in a smug sort of way watching the number of declarations of bitcoin's failure and imminent death. The website 99bitcoins.com has tracked bitcoin "obituaries," and now shows that cynics are flagging. TAKEAWAY: This is understandable since bitcoin has weathered a few winters and market slumps. It's also a pity, since an overlooked benefit of criticism is that it forces us to improve our explanations. There is still a lot of education to do; but it seems that there is now more career risk in dissing bitcoin than in suggesting that clients invest.   The Ripple suit: The list of crypto platforms dropping XRP in the light of the SEC's suit continues to grow, with Coinbase, Binance US, Genesis, OKCoin, Crypto.com and eToro USA joining the ranks. This week brought a twist to the tale, as a Coinbase client brought suit against the exchange for knowingly selling XRP as an unregistered security and pocketing the commission. Bitcoin. DeFi. Ethereum 2.0. The biggest trends in crypto this year began to move the needle in the rest of the world. Multi-billion dollar funds bought bitcoin as an inflation hedge. Institutions began discussing the merits of decentralization. And the banking sector warmed to crypto.    CoinDesk's 2020 Year in Review covers the major events, ideas and themes in crypto, and why they matter. The series is a comprehensive collection of op-eds, essays and interviews from some of the biggest names in crypto, published throughout the month.   Read more on how 2020 was crypto's biggest year yet. Podcast episodes worth listening to: The Devastation of Main Street Business, feat. Daniel Lacalle – Nathaniel Whittemore, The Breakdown Why Bitcoin Is Bigger Than an Inflation Hedge, feat. Dan Tapiero – Nathaniel Whittemore, The Breakdown Sound Money vs. the Great Reset, feat. Mark Moss – Nathaniel Whittemore, The Breakdown What 2020 Taught Us About the 'Dollar Milkshake Theory,' feat. Brent Johnson – Nathaniel Whittemore, The Breakdown Bitcoin & the Macro Backdrop with Brent Johnson from Santiago Capital – Preston Pysh, The Investor's Podcast Craig Warmke (N. Illinois University) on what Bitcoin is, and other philosophical questions – Nic Carter, On the Brink     Research Hub: New + Noteworthy Arcane Research: 2020 Summary           Vision Hill: An Institutional Take on the 2020 / 2021 Digital Asset Market CryptoCompare Exchange Review November 2020 GDA Capital: Cryptocurrency Mining on Blockchain Networks Ethereum On-chain Transaction Volume: Layered Information   SEE ALL OF THE RESEARCH HUB'S REPORTS HERE ATTENTION: Scammers have been sending fraudulent emails with links to sites disguised to look like coindesk.com. If you are in doubt about a link, type https://www.coindesk.com directly into your browser; do not copy and paste. Remember, if something seems too good to be true, it probably is. Crypto Long & Short   A newsletter from CoinDesk   See Previous Editions Copyright © 2020 CoinDesk, All rights reserved.    250 Park Avenue South New York, NY 10003, USA You can manage your preferences here or unsubscribe from all CoinDesk email.