Digital Assets Find Their Footing in Unstable Times

Socioeconomic forces have tipped in crypto's favor this year, says Arca Fund's principal.

AccessTimeIconDec 17, 2020 at 2:09 p.m. UTC
Updated Sep 14, 2021 at 10:44 a.m. UTC
AccessTimeIconDec 17, 2020 at 2:09 p.m. UTCUpdated Sep 14, 2021 at 10:44 a.m. UTC
AccessTimeIconDec 17, 2020 at 2:09 p.m. UTCUpdated Sep 14, 2021 at 10:44 a.m. UTC
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The British poet Alfred Tennyson once wrote: “Hope smiles from the threshold of the year to come, whispering ‘it will be happier’…”

The majority of those reading that line hope it applies to 2021 because this past year has been one of the more difficult in modern times. A global pandemic that began in December 2019 has now affected 65 million people around the world, killing 1.5 million. It has made us change the way we live our lives, from where and how we work, our children’s schooling, sheltering in home, how we interact in our local economies and so much more. 

This post is part of CoinDesk's 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. David Nage is principal at Arca Funds, which applies institutional-grade asset management processes to crypto.

With all the pain and heartache something happened along the way: eyes were opened, or, as some people call it, we got to see how the “sausage is made.” The response society witnessed from policy makers and central bankers this year has created one of the most significant catalysts of interest for digital assets.  

As Brent Schrotenboer writes and Federal Reserve Chair Jerome Powell confirmed on “60 Minutes” this year: “With a few strokes on a computer, the Federal Reserve can create dollars out of nothing, virtually ‘printing’ money and injecting it into the commercial banking system, much like an electronic deposit. By the end of 2020, the Fed is projected to have purchased $3.5 trillion in government securities with these newly created dollars, according to Oxford Economics.” 

Morgan Stanley chief U.S. equity strategist Mike Wilson wrote recently: “It’s fair to say we have never observed money supply growth as high as it is today. The year-over-year [percentage] change in the M2 supply is now north of 23%. To put that in perspective, year-over-year growth in the M2 money supply had never exceeded 15% until 2020, according to Fed records dating back to 1981.

“Just since February, a global total of $3.9 trillion (6.6% of global GDP) has been magically created through quantitative easing.”

Three letters: P-T-J

In March, the world was presented with one of the most important investment thought pieces penned about bitcoin. Many of us focused on the legendary Paul Tudor Jones, known and regarded as one of the most exceptional global macro investors of our time. However, upon deeper inspection, we noticed there was a co-author: Lorenzo Giorgianni. Why was this important? 

Prior to joining Tudor, Lorenzo held several senior positions at the International Monetary Fund in Washington for 17 years, where he took a leadership role in the IMF’s efforts to revamp the international financial architecture and resolve financial crises. 

Not a known ardent bitcoin supporter but rather a 17-year career professional from the IMF helped PTJ analyze and structure how bitcoin could play a role in an investor’s portfolio; revolutionary. 

And this was just the start. 

Corporations at the gate

PTJ’s letter created the single largest catalyst of interest in digital assets among the family office and institutional investor ecosystem. Up until that point institutional CIOs were making small personal investments in bitcoin and digital assets, not multi-million dollar investments. They were plagued with one thing: career risk. 

With Paul Tudor Jones on the “cap table,” they took the time to learn he had company with the likes of Abigail Johnson, Cathie Wood, Bill Miller and others. They were provided with some level of “cover.” 

Shortly after “the letter,” the digital asset ecosystem got more good news, this time from corporations. 

MicroStrategy (MSTR; market cap $3B), over a period of two months from August to September, acquired $425 million worth of bitcoin for its treasury. 

MicroStrategy CEO Michael Saylor said the Federal Reserve’s recent relaxation of its inflation policy helped convince him to put the remainder of the enterprise-software maker’s cash into bitcoin. Saylor went on to say he feels “pretty confident that bitcoin is less risky than holding cash, less risky than holding gold.”

We believe that bitcoin has the potential to be a more ubiquitous currency in the future.

Soon after, PayPal (PYPL; market cap of $250B), founded in 1998 by Elon Musk, Peter Thiel and other Silicon Valley legends, known as an online payments behemoth, announced plans to enable the buying, selling and use of digital assets with its over 300 million users and 25 million vendors. In just the first few weeks of enabling this service, Mizuho Securities has observed 20% of PayPal’s users have already used it to engage with bitcoin and digital assets. 

Square (SQ; market cap $90B), known as an early advocate of bitcoin, acquired $50 million of bitcoin in a similar manner to MicroStrategy. Square CFO Amrita Ahuja was on record as saying, “We believe that bitcoin has the potential to be a more ubiquitous currency in the future.” 

The most recent news came from Visa (V; market cap of $450B) announced it is connecting its global payments network of 60 million merchants to USDC, run by the Centre Consortium. 

All of this is in addition to news this year that banks such as JPMorgan are now providing banking services to Coinbase and Gemini makes it clear that multinational, billion-dollar, publicly traded corporations are accelerating their exposure to digital assets and businesses that are servicing this asset class. 

Beyond bitcoin

While bitcoin had one of the most significant years in adoption, another narrative began to solidify: the reimagining of traditional financial operations such as lending, borrowing and collateralization done via decentralized protocols. 

Decentralized finance, or DeFi, one of the most exciting experiments with goals of making unproductive assets productive, exploded in 2020. With the Total Value Locked (TVL) of roughly $830 million by the end of April, it emerged as an important sector in digital assets. What we saw during the next six months was significant; TVL grew month over month to reach over $14 billion as of this writing. 

While many believe bitcoin has the potential to displace gold with its $9 trillion market cap, those observing the function, tooling and growth in DeFi see it potentially displacing the world bond market totaling roughly $100 trillion. 

Additionally, 2020 also saw an emergence of a few themes that have been maturing over the past two years: Web 3.0 and gaming. With approximately 4.6 billion around the world using functions on the internet and 3 billion people around the world who play games, blockchain platforms addressing these markets have a lot of space to grow into. 

Gaming has seen rapid improvement in functionality and user experience in the last year. Barriers to entry such as installation of wallets and usage of digital assets have been lowered, making many new games easier to use while allowing players to potentially earn native digital assets. 

Web 3.0, the promise of an  internet void of centralized power authorities, saw infrastructure and functionality improve significantly in 2020 as well. With decentralized storage and indexing of data taking form, with interoperability platforms that pull from various decentralized protocols, enabling the build of more robust user applications, this space is moving from purely conceptual to reality exponentially. 

Final thoughts

While this has been an incredibly difficult year for all of us personally and professionally we have witnessed an explosion of interest and adoption of digital assets which many thought would take several more years to come to fruition. From legendary investors to multinational, publicly traded companies, forces that have altered the arc of socioeconomic paradigms created a need to reallocate bandwidth and focus on what has been built in this new, emerging, highly dynamic asset class. 

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