Cryptocurrency investment predictions for 2021

The institutionalization of cryptocurrency has been the emerging theme of 2020. The investment focus has largely been focused on Bitcoin, up over 90% year to date, as digital gold (i.e. a hard money alternative to fiat), with broadening adoption from institutional investors. Ethereum, the second-largest cryptocurrency, has seen some speculative investment but it will likely be a high beta alternative to the dominant narrative of Bitcoin as an institutional investment asset class.

Pensions, endowments, and hedge funds have been some of the institutional sectors either venturing into bitcoin for the first time or adding to exposures more meaningfully. One of the most exciting new institutional investment use-cases has been by corporates, US-based Microstrategy and Square have been two of the corporate pioneers that have added Bitcoin as a treasury management asset. Treasury management has been turned upside down as treasurers try to determine a strategy to manage their liquid assets in a period of global negative rates and quantitative easing, and Bitcoin is gaining favor as an alternative to fiat money markets or fixed-income investments. 

Institutional investment strategies and allocations take time to incorporate new asset classes. However, I believe we are now at an inflection point where allocations to Bitcoin will accelerate into the mainstream in 2021 and Bitcoin will become an essential allocation for any institutional portfolio.

Cryptocurrency investment predictions for 2021

The financial sector’s adoption of crypto is more advanced than that of the corporate sector. In terms of hedge funds and asset managers, when the end of year annual return leagues tables are published and early adopters see huge outperformance, it is certain that underperforming funds will be asked why they didn’t have any Bitcoin exposure. The effect could be similar in corporate markets, if those firms that have announced meaningful treasury allocations see their equity price outperform others, more firms will be sure to follow. 

It's very likely that the same Fear of Missing Out, or FOMO, we saw in 2017 that pushed retail into crypto and the Bitcoin price to its all-time high could be replicated in 2021 as institutional FOMO. A rapid acceleration in institutional money coming into Bitcoin would have a much larger and profound impact on the long term valuation of bitcoin--the risk is for a parabolic move in Bitcoin’s price in 2021.

On retail investors in 2021

Institutional investor adoption drives the build-out of institutional infrastructure to support Bitcoin’s adoption. This in turn provides the foundation for retail investment vehicles and retail on-ramps. PayPal`s announcement of their entry to the cryptocurrency market provides on-ramps to their roughly 350 million users, which will be sure to prompt other institutions to follow suit. We can expect that retail will play no small part in crypto as they are given easier and easier access to the markets. Bitcoin’s performance will drive the narrative and if the institutional market evolves as we expect in 2021, rapidly expanding on-ramps will only add fuel to the fire. 2021 is looking to be an exciting year for the sector.