Cryptocurrency Outlook 2021

 

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Early In but huge break out looms

Last year, cryptocurrency crept closer to widespread acceptance. Bitcoin quadrupled in price in late 2020, while the value of all cryptocurrencies passed $2 trillion in April 2021.

Large companies are increasingly accepting cryptocurrency and driving the higher valuations. In October, PayPal said that it would start accepting Bitcoin for payments, while Tesla's $1.5 billion Bitcoin purchase in February sent cryptocurrency values soaring to new heights but its later divestiture sent Bitocoin prices lower. Several financial institutions recently introduced cryptocurrency funds, further signaling a shift in perception.

Amid growing acceptance, markets are assessing how to view Bitcoin and other cryptocurrencies; for now, most banks and wealth managers are urging caution.

Cryptocurrency may be getting more popular, but it's quite different from traditional assets. To start, it's not legal tender. It's also far more volatile: While the forward-looking expected volatility for equity indexes is around 15%, and about 20%–22% for emerging-market equities, Bitcoin's average 3-year rolling realized volatility over the past 10 years was more than 100%.

Bitcoin volatility is declining, hovering around 80% over the last three years, and is expected to decline further as the cryptocurrency trades more broadly.New regulations that bring digital currencies closer to the traditional financial ecosystem could further dampen Bitcoin's swings, but volatility would need to decline a lot further to be comparable to other assets.

While cryptocurrency has gained prominence and value over the year, the IRS says tax reporting hasn't kept up.

The IRS treats cryptocurrency as property and, when it's sold at a profit, the tax collection agency will assess a capital-gains tax. If, that is, the IRS knows the transaction occurred

While financial institutions are required to report transaction sales and other information to the IRS so it can check tax compliance, there's little to no such reporting required of crypto exchanges currently. This lack of reporting can make bitcoin, ether and other cryptocurrencies attractive to criminals and tax evaders, and the IRS is determined to go after them.

Who are the Major Cryptocurrency Providers

By Market Capitalization, the major digital currency and blockchain solution providers are; Bitcoin (1 Trillion) - founded 2009; Ethereum – blockchain focused (250 Billion) - founded 2014; Ripple global payments (72 Billion) - founded 2012; Litecoin - cryptocurrency (20 Billion) - founded 2011; Monero - cryptocurrency (6.2 Billion) - founded 2013; and among others.

What is a Cyptocurrency

Dominated by Bitcoin, simply put, a cryptocurrency is a digital currency in which computer software encryption techniques are used to create and regulate digital units of currency and verify the transfer of funds all while operating independently of a regulatory agency or central bank.

At their core, these currencies provide an electronic payment system that enables secure paperless transactions from one person to another. The transactions are secured with cryptography (hence the name) and are entirely anonymous. Because cryptocurrencies are digital and direct, they bypass middlemen such as banks or credit card companies, they do not have a central monetary authority. The cryptocurrency market value stems from unitary market demand which is more akin to a listed stock share rather than a currency.

That said, the underlying technology that powers cryptocurrencies, is known as Blockchain.

What is a Blockchain

Blockchain is an open digital distributed ledger (each ledger component is called a block - hence many blocks are a blockchain) that permanently records transactions in a verifiable methodology in real time between two parties without the need for a single, centralized baking authority. Thus, cryptocurrency transactions that take place on the network are compiled into “blocks," which are added to the chain in chronological order. Everyone who participates in the network has a copy of the blockchain, which contains a record of every transaction ever made, on their local computer. This distributed network of computers is used to validate transactions and prevent conflicts, tampering and duplication.

By offering a secure and efficient method of exchanging and validating transactional information, blockchain technology could have a tremendous impact on the global economy, with significant implications for banking, financial services, health care, and other transactional businesses.

As the underlying technology of cryptocurrency, blockchain technology has the potential to over the long run become more meaningful than the cryptocurrencies it powers. As blockchain reaches a scaling watershed, there's one key differentiation that the world will come to acknowledge, one that enthusiasts are likely already very familiar with—the difference between Bitcoin, Ethereum and other decentralizing technologies. Bitcoin's ascension to digital gold has been astronomical, and has signaled the beginning of a whole new techno-economic era. But digital gold is just that—a beginning.

How Cryptocurrency Works

Transactions are transferred between peers and confirmed in a public ledger (blockchain) via a process known as mining. The use of cryptocurrencies for payment is similar to that of PayPal or Bank Credit Cards. The main difference between cryptocurrency and bank credit is that instead of banks and governments issuing the currency and keeping ledgers, a computer algorithm securely issues and keeps all records.

Transactions are sent between peers from "cryptocurrency wallets" by matching up public codes which relate back to user-held private passwords (AKA cryptographic "keys"). Transactions made between peers are recorded on a public ledger of transactions called a "blockchain." All users of a given cryptocurrency vendor have access to the ledger if they choose to download a "full node" wallet (as opposed to holding their coins in a third party wallet like Coinbase).

The transaction amounts are public, but who sent the transaction is encrypted. Each transaction leads back to a digital "cryptocurrency wallet." Whoever owns the password (or key) to the wallet, owns the amount of cryptocurrency denoted on the ledger. When someone sends or receives cryptocurrency, when they send from one wallet to another wallet using a set of private and public passwords, that transaction is queued up to be added to the ledger. Many transactions are added to a ledger at once. These "blocks" of transactions are added sequentially. That is why the ledger and the technology behind it are called "block chain." It is a "chain" of "blocks" of transactions.

What is Cryptocurrency Mining

People who are running software and hardware aimed at confirming transactions to the digital ledger are cryptocurrency miners. Solving cryptographic puzzles (via software) to add transactions to the ledger (the blockchain) in the hope of getting coins as a reward is cryptocurrency mining. Each digital coin has both a private and a public key that enables secure trading, selling and spending

People who are running software and hardware aimed at confirming transactions to the digital ledger are cryptocurrency miners. Solving cryptographic puzzles (via software) to add transactions to the ledger (the blockchain) in the hope of getting coins as a reward is cryptocurrency mining. Each digital coin has both a private and a public key that enables secure trading, selling and spending

What is a Cryptocurrency wallet

A cryptocurrency wallet is a software program that stores private and public keys and interacts with various blockchains cryptocurrency vendors) to enable users to send and receive digital currency and monitor their balance. If you want to use Bitcoin or any other cryptocurrency, you will need to have a digital wallet.

Unlike traditional "pocket" wallets, digital wallets don't store currency. In fact, currencies don't get stored in any single location or exist anywhere in any physical form. All that exists are records of transactions stored on the blockchain.

Cryptocurrencywallet are available for Desktop, and mobile devices. There is an ever-growing list of options. Before picking a wallet, you should, however, consider how you intend to use it.
* Do you need a wallet for everyday purchases or just buying and holding digital currency for an investment?
* Do you plan to use several currencies or one single currency?
* Do you require access to your digital wallet from anywhere or only from home?
* Take some time to assess your requirements and then choose the most suitable wallet for you.

Cryptocurrency as a Currency

As a means of exchange, cryptocurrency offers several advantages, including enhanced privacy, independence from country-specific monetary policies and substantial cost reductions for transactions

Bitcoin and blockchain will finally break up

The current market capitalization of gold is $8 trillion dollars. That's an eye-popping number, sure, but it represents a potential ceiling market opportunity for Bitcoin's digital gold. Smart contract-enabled blockchains like Ethereum will digitize the global economy and unlock value in the whole spectrum of assets and processes. In turn, decentralized networks will reach into the farthest corners of every industry on the planet (and beyond). We will be able to digitally represent fiat, gold, software licenses, equity, debt, derivatives, loyalty points, reputation ratings, and much more that we can't even conceive of yet. That's a market opportunity estimated at well over $80 trillion dollars. Bitcoin is a singular use case. Comparatively, Ethereum has infinite use cases. As a result, Ethereum is well poised to become the Google of the Block Chain/Cryptocurrency markets.

The U.S. to play catch-up to China

Like onionsand like blockchain networksare all about layers. With the rollout of the Istanbul hard fork, Ethereum is on its way towards 2.0 levels of scalability at layer one. Joe Lubin stated last year at SXSW that Ethereum will process millions of transactions a second. How it achieves this is a combination of steady upgrades to the layer one network and integration of layer two scaling implementations.

Poon and Buterik's solution of Plasma's blockchains on blockchains was not just brilliant and prescient, it was the inception of a whole sector of Layer Two development. Sharded chains may occupy much of the debate at the moment, but state channels being developed by Celer, Connext, and Counterfactual will be the massive mycelial data network underground that unleashes the main chain to operate unencumbered by state weight. Sidechains will transact the bulk of lower-risk transactions rapidly. Payment channels like Raiden will enable instantaneous token transfers, while ZK-Snarks will keep all of your data private amidst all the transactional action. The stack is all there, and 2020 will see 2.0 come to life.

In the meantime, innovations like Plasma's Optimistic Virtual Rollup means that projects don't have to wait for the transactional throughput they need to flourish. That's huge. There was a time when blockchain scaling was driven by theory and hope. No longer! The incredible, global, decentralized dev teams working on Ethereum will change the world with this technology, and we are all eternally grateful.

Layers of the Web 3.0 stack go live

A decentralized environment is about more than just shards and nodes, and we'll see how that manifests in 2020. Web 3.0 will be defined by mesh networks connecting smart contracts, file storage, messaging, payment channels, side chains, oraclesthe list goes on. 2020 will see many essential infrastructural elements of Web 3.0 go live.

What is Web 3.0? Here's a quick breakdown:

A decentralized environment: is about more than just shards and nodes, and we'll see how that manifests in 2020. Web 3.0 will be defined by mesh networks connecting smart contracts, file storage, messaging, payment channels, side chains, oraclesthe list goes on. 2020 will see many essential infrastructural elements of Web 3.0 go live.

The automation of agreements: Microsoft Word legal documents will turn into digital - If > Then > Else lines of computer code that will move the aforementioned digital assets trustlessly, creating completely new business models like an employment agreement that gets paid by the minute, a piece of art that can pay a royalty to an artist every time it is sold from one owner to the next, a piece of real estate that can pay its investors automatically every time rent comes in, the ability to divide income amongst band members every time a song is played, or routing an electron efficiently to various parts of a micro-grid.

Self-Sovereign Identity: Instead of logging into Airbnb, Facebook, Uber, et al, you will log into your own self-sovereign browser, and will have the same ability to rent a hotel room, use social media or hail a car, but instead of the legacy application providers the same service will occur peer-to-peer, rather than through a thin layer of rent-seeking intermediation. You'll get paid $1 dollar a day to look at advertising when on social media instead of Zuckerberg and your ride and home shares will be 2/3rd of the current cost.

Some examples: The Interplanetary File System ( IPFS - A peer-to-peer hypermedia protocol designed to make the web faster, safer, and more open and powers the distributed web.) has already showed the nature of data file storage on the decentralized web. Protocol Labs' Filecoin builds on IPFS to rent users' hard drive space for crypto. The platform is on schedule to launch in March, with the testnet just launched very recently.

Helium is a mesh network where stakeholders purchase nodes under $500 to provide low bandwidth for Internet of Things devices. Tom Shaughnessy of Delphi Digital recently noted, “Since going live on August 1, 2019, over 2,130 nodes are live on the network covering 90% of U.S. states across 425+ cities. At Verizon's IoT costs (600KB/year for $12), Helium is underpricing Verizon by 99.9988% ($0.00001 for 24 bytes or 0.024 KB). This type of price consolidation we should expect from the next generation of cell phone service providers, data storers, and truly any intermediary via a decentralized world wide web.

The ills of Libra will continue

Facebook's Libra may not go live in 2021 in any form of scale. The decentralized wolf in sheep's clothing has already done much to bring blockchain to the forefront of global discourse—for better, and at times, for worse. But the company is learning fast that consensus and deployment do not always adhere to the best laid plans of even billionaires. When it does go live, Libra will undoubtedly be a force of education and adoption for billions of people. Farmville with crypto? Before it gets to that point, however, expect Chinese organizations like WeChat, Alipay, and Alibaba to aggressively pursue first mover status in the space given the recently relaxed regime in the country. As a result of dubious election adds, trust in Facebook remains stagnated as another election year looms in the US. Social media has proven to be problematic and we can only guess what ills Facebook's version of social banking may hold within.

Internet Self Sovereignty Will Become a Right

With hacks and breaches in both Web 2.0 and Web 3.0 environments a daily occurrence, it's clear that change is a necessity. Projects like the Decentralized Identity Foundation have taken major strides in establishing open source standards that will furnish the whole blockchain ecosystem with digital identity components that are trustworthy and decentralized. Blockchain IDs and zero-trust datastores like those created by uPort and 3box will rapidly replace the creaky walled databases which are relied on now. Establishing this web of trust may be amongst the most important pieces of the blockchain puzzle in 2020.

Web 2.0 stalwarts like IBM and Microsoft are well aware of the urgency of the issue, and they've allocated substantial resources to iterating digital identity in their own image. But self-sovereignty must be just that—owned by ourselves—before the internet can be truly democratized. Ownership and privacy of data will soon be seen as a human right, and self-sovereignty is the solution to attaining it.

The sleeping giant of blockchain awakens Supply Chain

Counterfeit goods represent a market of over $1.8 billion dollars annually, with some estimates seeing that number rising over 10% as production and online distribution methods improve. Household names like Louis Vuitton and Levi's have been quietly perfecting proof of concept trials with leading blockchain companies to ensure provenance and protect consumers on a global scale. Treum has already shown the value of blockchain-ensured supply chain processes on items ranging from salsa to tuna to skincare products. Now, major box retailers like Walmart and international food corporations Nestle and Dole are diving in head-first. A recent report stated that companies in Western Europe alone are set to save $450 billion dollars in the next fifteen years with blockchain based supply chain solutions, with operating costs reduced almost 1% across the board.

Art and Music will take a lead in consumer-interfacing blockchain applications

Blockchain's impact on art, music, and the creative space will be profound. In a 2014 report, The Fine Arts Expert Institute (FAEI) in Geneva stated that over 50% of artworks it had examined were either forged or not attributed to the correct artist. Blockchain can fix this now. The payment, certificate of authenticity, and ownership history are irrevocably recorded on the Ethereum blockchain with Treum. By this time next year, this process will be far more commonplace. And it's not just provenance that makes the arts a prime field for blockchain implementation. Tokenized ownership and the establishment of equitable business models not beholden to gatekeepers have the attention of the art world already. Watch this space.

Conclusion

2021 will realize the breakout of crypto currency into the mainstream, blockchain and web 3.0, and all of this will lead to the next industrial revolution, one driven by utility, not speculation. This progress towards global decentralization and automation will lead to the most prosperous society we've ever had.


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