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Global Disruptors - Cryptocurrencies 2021

Global Disruptors - Cryptocurrencies 2021

The Finance Ghost | South Africa | 20 April 2021

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Report Coverage

This report focuses on cryptocurrencies and includes comprehensive information and descriptions of their use, the mining process, wallets, and exchanges. There is detailed information on decentralised finance and non-fungible tokens, and an examination of issues affecting the sector such as regulation, central bank response and environmental concerns.

Introduction

Cryptocurrencies, such as bitcoin or ethereum, are digital tokens and assets secured through a mathematical technique known as cryptography. They are designed to offer a decentralised store of value and method of exchange, derived from encryption techniques applied by powerful computers rather than issued by governments.\r\n\r\nCryptocurrencies rely on blockchain technology for secure transactions. Through ensuring that cryptocurrencies cannot be counterfeited or double-spent, the goal is to provide a viable alternative to so-called “fiat currencies” like the dollar or rand. \r\n\r\nRetail investment interest in cryptocurrencies has grown exponentially. Coinbase, a crypto exchange that listed on the Nasdaq on 14 April 2021, grew retail users from 13,000 to 43 million between December 2012 and December 2020. The exchange also boasts 7,000 institutions trading through its platform.\r\n\r\nIn April 2021, there were over 9,200 cryptocurrencies referenced on coinmarketcap.com with a combined market cap of over US$2.2-trillion. Bitcoin contributed over 53% of this number with ethereum contributing over 12%. \r\n\r\nBitcoin has achieved increasing levels of institutional acceptance. Major global payments companies such as Visa, Mastercard and PayPal are putting in place strategies to integrate cryptocurrencies into traditional payments infrastructure. Companies such as Tesla are buying bitcoin as part of their corporate treasury strategies. Asset managers such as BlackRock have signalled an intention to add bitcoin to their funds.

Strengths

• Acceptance as an investable asset by companies and asset managers gives credibility to cryptocurrencies.
• Accessible by people who are unbanked and live in remote areas (subject to in-country regulations).
• Adaptability for different uses such as digital gold, transactions, decentralised finance, non-fungible tokens for creative pieces etc.
• Decentralised technology not controlled by a single government or institution.
• Extensive development has taken place in supportive technologies like exchanges and mining hardware.
• Widespread acceptance among retail investors of bitcoin, ethereum and limited other coins.

Weaknesses

• Contagion risk – people see cryptocurrencies as a single asset class and losses in one coin may impact perception of all coins.
• Decentralised finance market is largely untested and unregulated, mainly appealing to those who are comfortable with crypto technology rather than mainstream participants
• Highly inefficient for transactions compared to current payment mechanisms in terms of speed of transaction and environmental impact.
• Limited acceptance beyond bitcoin and ethereum – the crypto market has an extremely long tail.
• No accepted valuation methodology.

Opportunities

• Integration into entrenched international payments infrastructure, social networks and gaming platforms.
• Obtain greater share of “safe-haven wallet” among investors.
• Popularity among younger demographic suggests strong demand into the future and likelihood of further innovations.
• Shift from proof of work to proof of stake on blockchains with transactional applications (e.g. ethereum).

Threats

• Based on perceived value rather than underlying cash flows and perceptions can change over time.
• Breakdown in trust of the technology.
• Carbon taxes on mining (especially bitcoin).
• Concentration of mining operations in China which has indicated discomfort with this industry.
• Cyber-attacks and hacking.
• Heavy-handed regulation by governments.
• Potential of central bank-backed digital currencies to disrupt existing cryptocurrencies.

Outlook

While risks are abundant, retail and institutional interest in cryptocurrency has never been stronger. In April 2021, the bitcoin price achieved fresh all-time highs. Driven by numerous factors including stimulus payments in the US and general excitement around new platform technologies, the cryptocurrency wave is gaining momentum.\r\n\r\nWhile market volatility is inevitable, the focus area going forward will be on the development of underlying blockchain technology and its rate of integration into the traditional financial system. The use of blockchain technology in platforms like Facebook and Amazon to enable payments and secure transactions among consumers will be a key case study for the power of the technology. \r\n\r\nThe biggest risk for blockchain is arguably its environmental impact. The focus going forward may be to clean up the environmental image of cryptocurrencies, which could disrupt the existing leading coins like bitcoin which are highly inefficient from an environmental perspective.\r\n\r\nThe introduction of digital currencies by central governments, which would combine blockchain technology and central bank support for such currencies, could disintermediate fintech companies that have created payments solutions for existing fiat currency infrastructure and inefficiencies. \r\n\r\nAlthough bitcoin has led the way in the initial era of cryptocurrency, the technology has moved well beyond that initial use case. The disruptive nature of blockchain is arguably in its infancy, with the potential to change the face of financial services and payments infrastructure across the world.

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Global Disruptors - Cryptocurrencies
Global Disruptors - Cryptocurrencies 2021

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Table of Contents

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PAGE
1. INTRODUCTION 1
2. DESCRIPTION OF THE INDUSTRY 2
2.1. Cryptocurrency as a Store of Value – The Digital Gold Case 2
2.2. Cryptocurrency for Payments – The Utility Case 3
2.3. Mining and Processing of Transactions 5
2.4. Cryptocurrency Wallets 7
2.5. Cryptocurrency Exchanges 8
2.6. Decentralised Finance (DeFi) - Blockchain Disruption 9
2.7. Non-Fungible Tokens (NFTs) – Digital Art 11
3. SIZE OF THE INDUSTRY 12
3.1. Cryptocurrency Market Capitalisation 12
3.2. Cryptocurrency Payments 13
3.3. Cryptocurrency Mining 13
3.4. Cryptocurrency Exchanges and Asset Managers 14
3.5. DeFi and Smart Contracts 15
3.6. Non-Fungible Tokens (NFTs) 15
4. STATE OF THE INDUSTRY 16
4.1. Significant Trends 16
4.2. Regulations 18
5. INFLUENCING FACTORS 21
5.1. Response by Central Banks and Mistrust of Governments 21
5.2. Environmental Concerns 22
6. SWOT ANALYSIS 23
7. OUTLOOK 24
8. REFERENCES 25
APPENDIX 1 26
Notable Players 26