Mid-Year Review of Our 2020 Predictions
At the onset of the year, we released our annual digital assets predictions, which focused on a few themes that we believed would emerge this year that would ultimately drive the majority of investment gains in digital assets. Obviously we did not anticipate COVID-19 and the accompanying acceleration of the shift from physical to digital, but we still got a tremendous amount right despite an event that we did not foresee.
At the midpoint of the year, we’re taking a look at how some of these predictions have fared, what we think will happen going forward including a few new predictions for the rest of 2020 and beyond.
Post Mortem of 2020 Predictions
Prediction #1: Thematic investing will drive crypto performance, specifically in the following areas: Rewards, Structured Tokens, Staking, and DeFi.
Thematic investing has unequivocally been the main driver of returns thus far in 2020, and 3 of the 4 specific themes we identified have proven accurate. The lone outlier was the staking theme, which has not been a large driver of YTD returns. In fact, most of the tokens that operate under “proof of stake” consensus have underperformed the market this year, with a few even posting negative YTD returns. However, the reason for this underperformance can largely be attributed to the success of our other three identified themes. The growth of Decentralized or Open Finance (DeFi) and the newfound focus on tokens structured with real accrual mechanisms (and yields), driven primarily by user rewards, has made staking for yield somewhat obsolete from an attractive investment standpoint.
Let’s start with DeFi. This sector of the market has been hands down the runaway leader in digital assets, from both a growth perspective and a returns perspective. And as simple as our thesis was, it could not have been more right...
… a blind basket of DeFi tokens has created the strongest subset of returns across any other sub-sector of digital assets. Decentralized trading exchanges (DEX’s) have been the most impressive, posting all-time record high volumes, but we’ve also seen strength and growth coming from decentralized asset management protocols, synthetic assets, lending/borrowing platforms, and insurance.
YTD Returns and Volumes from the DeFi Sector
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Moreover, the returns generated from investing in tokens in the DeFi sector did not come just because of platform growth. Much of it can be attributed to our other prediction, “structured tokens and enhanced tokenomics”. The flexibility of token structures has allowed token issuers to change the rules and enhance the features that come with owning a token and participating in the network. While this can be scary from a legal standpoint, it’s also invigorating from an investing standpoint because it allows good teams who issue tokens to continue to tweak the value accrual model until they get it right. And boy are they ever. From Compound (COMP) and the liquidity mining revolution, to Synthetix (SNX) and its velocity sink, to a revamped incentive structure rewarding governance at Kyber (KNC), token issuers are scrambling to introduce new models that enhance the value for users and investors. We applaud this evolution.
Expectations for the rest of 2H2020: We believe DeFi will stay hot, but returns will cool down, if for no other reason than the expectation that more competition is coming. The entire digital assets world has seen how a proper token structure can help bootstrap user growth and activity, and we expect an oversaturation of new tokens coming to market in 2H2020. This will likely mean that investing in this space may become a bit of a game of “hot potato”, as users and investors flock to the newest, flashiest toy. That said, we expect overall growth in the DeFi space to continue, with select investments doing very well. We are sticking with a thematic basket of DeFi tokens.
Prediction #2: Sports and other live events will play a huge part in blockchain’s success as the “live, in game experience” will be enhanced via digital tickets, voting rights, and player engagement.
We had no idea that sports would be shut down in 2020, but I’m not sure it would have mattered much as our thesis was taking form with or without the lockdown. The in-game experience was already dying at the hands of interactive, at-home engaged fan experiences, and COVID-19 was simply the nail in the coffin.
Expectations for the rest of 2H2020: We are sticking with our investment in Socios and its Chiliz (CHZ) token, as we believe the growth in Fan Engagement tokens is just getting started. Separately, all eyes are on Spencer Dinwiddie’s SD26 token offering via Dream Fan Shares. Should he be successful in issuing a token with a fixed interest rate backed by his income from the NBA, we expect that it will open up the floodgates for other athletes to issue similar tokens. We are very excited about this development and will likely be active participants in select future offerings.
Prediction #3: More M&A, the Bitcoin Halving matters, and existing non “crypto-native” companies will issue tokens.
Let’s check in one-by-one to see how we did:
- More mergers between pick & shovel companies, often at distressed levels: From Coinbase assuming Tagomi, to Binance going on a spending spree, M&A is in full force as the leading service providers take advantage of the oversaturation of smaller platforms that never achieved success. As predicted, several of these transactions were more takeunders than takeovers given the lack of progress or success of the acquirees.
- The Bitcoin halving, while telegraphed and understood, will still be a huge driver of digital asset growth: While the halving itself, as expected, did basically nothing for Bitcoin’s price in real-time, the consistent monetary policy and limited fixed supply is attracting new players. From Paul Tudor Jones to Jim Simons, the cavalry is clearly on its way.
- Existing non-crypto native companies will utilize tokens: It’s happening, slowly. Both Reddit to Atari are issuing tokens. While these are just small examples, the world is beginning to recognize that tokens can be utilized in a company’s capital structure as complements to debt and equity. But this has yet to play out in a meaningful way so far.
Expectations for the rest of 2H2020: We believe consolidation will continue, and large conglomerates are in the driver’s seat so they will continue to pick off cheap assets. We believe Bitcoin will ultimately be a great investment in 2H2020 as a flood of new investors flock into the space, and there just won’t be enough BTC offered to satisfy this new demand. And we expect every company with a strong and loyal customer base to eventually recognize the benefits of issuing a token, from Starbucks to Delta to Amazon, though that is likely not going to be a 2020 event.
Prediction #4: “No-coiners” will be pushed into the digital asset realm for the following reasons:
Expectations for the rest of 2H2020: This theme is growing louder now as we embark upon record, and arguably reckless, monetary and fiscal stimulus. Younger generations are buying risk assets while boomers are selling, driving up valuations, but they are also shunning homeownership and will likely drive the elections in November. This pushback makes future adoption of alternative solutions, like digital assets, much easier to fathom. I expect the muted volatility in risk markets to manifest in other areas, like social unrest.
Data Privacy: There is now a loud and growing pushback over data collection and privacy. This anti-FANG crusade may even seep its way into government.
Expectations for the rest of 2H2020: From Facebook, to Twitter, to Amazon, TikTok and even Zoom, every major tech company is under the microscope over centralizing data and misuse of this data. We expect this will ultimately lead to the successful rise of a few decentralized marketplaces (“Web 3.0”), where users control their own data rather than giving it up to 3rd parties.
Digitizing Everything: Money is the last thing to be digitized, and moving money seamlessly from one app to another without a bank or middleman will just seem obvious… soon.
Expectations for the rest of 2H2020: There has been a loud cry to digitize payments sent to Americans in the form of Universal Basic Income. We expect more and more assets, from equities to debt to real estate, to be digitized as well.
Nowhere Else to Turn: Investors will begin to realize how few opportunities there are in traditional asset classes, and will stop buying worthless assets that promise growth in favor of new technologies that are actually growing. When (if) the music stops for equities, they will turn to protection of assets rather than growth of assets. To protect against systemic banking risk and/or currency devaluation, digital assets will be a choice.
Expectations for the rest of 2H2020: Despite the recovery in Equity and Debt prices, we pretty much nailed this one. The incoming emails and phone calls we are receiving at Arca are relentless, and we expect this to continue. Capitalism is either breaking, or is already broken, and investors know it even if they are still playing the game. We expect more of the same regardless of what debt and equity markets do in the 2H (though we expect traditional markets to give back a lot of the 2Q gains once 3Q and 4Q earnings show how toothless this rally has been).
Expectations for the rest of 2H2020: Once again, we nailed this. The amount of public vitriol towards large banks and financial institutions is growing louder by the minute. We wrote about this a month ago, and could probably write about it every week. Traditional finance will continue to lose ground to FinTech and Decentralized Finance.
New Predictions for the remainder of 2020 and Beyond
We still believe in our original 2020 predictions, with the exception of staking because staking alone does not create nor reward active network participation, it simply acts as a tax on those who do not stake. But the onset of COVID-19 has introduced some new concepts that we are now looking to incorporate into our investment theses for the remainder of 2020 and beyond.
New Prediction #1: Money
We believe Bitcoin is the only true, global digital currency, that offers a hedge against potential financial system collapse and an alternative to fiat. People across the globe will likely continue to seek return of capital over return on capital, and Bitcoin will be a logical choice. While there will be other, and perhaps better, mediums of exchanges (including Central Bank Digital Currencies or our own ArCoin), we believe Bitcoin will remain the best insurance policy against currency collapse and a complete unwind of the financial system as we know it.
New Prediction #2: Paradigm Shift
A recession is coming, if it’s not already here. But this is not the only reason equities will suffer. Corporations across the globe are now being forced to consider “increasing societal value” over “increasing shareholder value”. It’s bad enough that companies didn’t even have 2 months saved away in a rainy day fund after record stock buybacks, but now they will be forced by further societal pressures to enhance their communities and constituents, not just their wallets. This leads to greater digital asset adoption, which is a way to let your community and network gain along with you instead of, or in addition to, shareholders.
New Prediction #3: The Rise of Non-Fungible Tokens (NFTs)
When you buy BTC or ETH, it doesn’t matter which tokens/coins you own, as they are all the same. Non fungible tokens (NFTs) on the other hand, are individually unique. Unique assets like art, property, collectibles, plane/train/bus tickets, vehicles are all prominent aspects of a functioning society. NFTs offer a way to create digitally verifiable ownership of these assets by means of tokenization, which opens up the ability to utilize these assets across platforms. Creating a circular economy for legacy assets, as well as new assets, will be the next step towards the exchange of scarce assets. We are already seeing this happen in the gaming industry (with in-game assets being given economic value), and future iterations could intertwine the sports industry and the digital asset space. We expect this sector to heat up for the remainder of the year, as decentralized finance continues to gain steam and scarcity is becoming more attractive to the individual.
New Prediction #4: Health-conscious Decisions
Staying healthy has become the number one priority post COVID-19, which has made us rethink how we go about activities in our everyday lives. Everything from handling physical cash, to health insurance, to attending school/the gym/conferences is rapidly changing as society has become socially distanced. We expect an almost immediate move away from cash to contactless payment solutions as a direct result. We have already seen the rise of virtual options for how we workout, attend class, or participate in networking events. Additionally, the focus on health may finally lead to an overhaul of the insurance and healthcare system.
As always, we’ll check back in later to see how many of these predictions turn out to be accurate. In the meantime, the Arca research team will continue to look for the best and most appropriate ways to express these views.
What We’re Reading this Week
According to a report released last week by the Financial Action Task Force (FATF), stablecoins may face further regulation. The FATF, which sets rules for among 200 of its member countries to prevent money laundering and the financing of terrorism, is recommending that stablecoin issuers, exchanges, and other businesses that support stablecoins, comply with rules similar to those regarding the treatment of virtual currencies (like Bitcoin). This would mean that stablecoin issuers such as Tether or Facebook’s Libra would need to adhere to anti-money laundering and know your customer regulations.Those that support the transfer of stablecoins would also have to monitor transactions and submit regulatory filings. The potential regulations make sense given the explosive growth in stablecoins this year with Tether’s market cap growing from $4 to $10b since the beginning of the year.
India’s largest tech company and second-largest company, Tata Consulting Services (TCS) launched a crypto trading service for institutions called “Quartz Smart Solution for Crypto Service”. The service will allow banks and investment firms to offer crypto trading of multiple assets to their clients. The news is incredibly promising for the growth of crypto in India and indicates demand among customers for exposure to the asset class.
The Afghan Ministry of Health along with several pharmaceutical distributors is trialing blockchain startup Fantom, in order to fight Afghanistan’s counterfeit drug problem. According to the WHO, 1/10 medical products in developing countries are substandard or falsified, making tech solutions like Fantom’s necessary. The pilot project will have Fantom design shipping labels scanned by the pharmaceutical distributors at every step of the process. These labels will contain a unique code containing the product’s full information which can be verified on the public blockchain.
Oxfam received a grant last week from the European Commission for a pilot project using blockchain technology to deliver international aid. The pilot builds on the group’s efforts from 2019 where it used distributed ledger technology (DLT) to “smart vouchers” to disaster victims in Vanuatu. This next phase of the trial will extend the reach of the program to more residents and eventually to other geographies beyond the Pacific region. According to Oxfam, the use of DLT reduced delivery times by 96% and decreased costs by 60%. Aid distribution and tracking is among the many industries that blockchain technology has the ability to better.
And That’s Our Two Satoshis!
Thanks for reading everyone!
Questions or comments, just let us know.
The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Head of Research
Hassan Bassiri, CFA - PM / Analyst
Sasha Fleyshman - Trader
Wes Hansen - Head of Trading & Operations
Alex Woodard- Analyst
To learn more or talk to us about investing in digital assets and cryptocurrency
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