This post is part of CoinDesk's 2019 Year in Review, a collection of 100 op-eds, interviews and takes on the state of blockchain and the world. Charles Hayter is co-founder and CEO of digital asset data platform CryptoCompare. The views expressed here are his own.
Cast your minds back to the beginning of 2019 and the tenth anniversary of the mining of the bitcoin genesis block. The industry had very little to celebrate. Prices had sunk to new lows, while startups and even some of the industry’s heavyweights were beginning to feel the pinch.
There is a plethora of factors that drive interest in cryptocurrency. Two major dynamics are market volatility and clear examples of mainstream adoption. But there was little of either as the industry entered the new year: large-cap coins flatlined and volumes hit rock bottom. Wall Street firms like Goldman Sachs and Morgan Stanley quietly shelved plans to offer cryptocurrencies to their institutional clients. It seemed people had simply stopped caring about digital assets.
Now, as we approach year's end, we can see four major positive trends emerging.
First and perhaps foremost, we have seen rapid experimentation and implementation. A year of breakneck trial and error, development and refinement has seen the cryptocurrency market break into entirely new territory. Popular sportswear manufacturer New Balance began using the Cardano blockchain in its global supply chain; Malta’s Gambling Authority tested cryptocurrency in casinos; and the Bank of France said it will initiate trials for a digital currency in early 2020.
Second, there has been an explosion in the size and accessibility of crypto derivatives. Once the province of less than a handful of exchanges – notably Bitmex – large, established spot venues such as Binance, Huobi and OKEx, now all offer futures and even options on large-cap crypto assets. Looking at BTC Perpetual Futures, we can see how the market is becoming increasingly competitive as major exchanges begin to make inroads.
We are likely to see this trend solidify in 2020 as the dominant spot exchanges flex their considerable muscle in the derivatives market.
Third, decentralized finance (DeFi) has become a hotbed of innovation. The total value of DeFi projects has nearly tripled this year to over $650 million. Leveraging new technologies for the trustless and secure provision of financial services means entirely new lending and margin trading facilities – wholly inconceivable only a few years ago – are now readily available. Traders can now seamlessly swap between different debt positions using InstaDApp, and companies such as Babel Finance in China provide large-scale miners with ready access to capital through crypto as collateral.
Last but not least, the industry has worked hard over the past year to solve some of the problems plaguing cryptocurrencies. New custodial solutions not only help companies and high net worth individuals keep cryptocurrencies secure from hackers, but some even allow remote token staking, meaning holders can secure the network and earn a passive income without putting themselves in harm’s way.
Overall, a great deal of work has been undertaken to establish best practices in the digital asset class. Industry bodies such as Global Digital Finance have worked with members to promote a shared set of professional standards that include a commitment to comply with relevant regulations. Substantial progress has been made worldwide with respect to regulation, encouraging financial market institutions to wake up to the potential of digital assets – both in terms of their ability to change the economic landscape and to offer an uncorrelated asset class. With companies such as JPMorgan beginning to implement their own digital currencies, it is fast becoming clear that even the digital markets’ biggest critics recognise this potential.
A surge of interest in crypto markets came in June with the Facebook Libra announcement: CME Group’s cash-settled bitcoin futures saw open interest hit an all-time high of 5,311 contracts totaling 26,555 BTC, then worth around $246 million.
Also this year, nation-states signaled interest in cryptocurrencies. The Chinese government went from banning citizens from buying cryptocurrencies with renminbi to announcing in October that China fully endorsed blockchain technology and was developing its own state-backed digital currency. Trials are expected to take place in Shenzhen and Suzhou very soon.
In the U.S. too, politicians and regulators have softened their position and Federal Reserve Chair Jerome Powell even hinted at the release of a digital dollar. Cryptocurrencies may well end up playing an important role in shoring up nations’ economic supremacy.
In the private sector, regulated platforms have built out market infrastructure to accommodate mainstream demand. The launch of Bakkt’s physically-settled bitcoin futures in September represented a major step towards providing institutional investors with a regulated means to gain exposure to cryptocurrency. And CME, which first launched its BTC futures in December 2017, is planning to launch options in early 2020, just as Bakkt did earlier this month.
Additional products that have come to market include exchange-traded products on the SIX Swiss exchange offered by Amun and MVIS and powered by CryptoCompare data. A bitcoin ETF may not be in sight just yet, but institutional investors are entering the asset class through alternative instruments. Grayscale Investments, the largest digital currency asset manager, attracted a record $254.9 million in Q3.
Importantly, the data underpinning the markets have seen a major cleanup this year after data providers and the industry as a whole woke up to the problem of "fake" volumes and the lack of transparency surrounding trading venues. With more granular metrics now available to rank good and bad actors, the industry is better equipped for decision making.
So as we look back over the last 12 months, the digital asset markets have diversified and grown. New trading facilities allow for more sophisticated strategies, as new service providers turn crypto from fringe asset class to fintech innovation hub. Vital market infrastructure and products tailored to a more sophisticated investor base are now readily available, encouraging traditional firms to enter the asset class. The regulatory framework, though nascent, is providing greater clarity to ensure market participants have a legitimate space to operate in.
We may still be far from the $20,000 bitcoin high in December 2017, but the mainstream foundations are now in place. As cryptocurrency enters its second decade, broad adoption will get well underway.