The last three years have been something of a turning point for crypto. Both total market capitalization (around $1 trillion) and total users (around 300 million) have reached all time highs, and discussions about crypto have seeped into the mainstream discourse.
Indeed, although recently the Bitcoin price has fallen significantly and other top cryptocurrencies are in a confirmed bear market, the institutional relevance of crypto remains deep and widespread.
So let’s take a moment to gaze into the future and examine the most significant crypto trends to watch for the next three years.
1. Institutional adoption of crypto
Not too long ago, blockchain technology and crypto assets were treated with skepticism or outright hostility by most financial institutions.
Now, these same institutions are pouring capital into the cryptocurrency market, managing and holding Bitcoin, Ethereum, and altcoins alongside more traditional assets. In 2020 alone, the amount of institutional crypto assets under management saw a near eight-fold increase, from $2 billion to $15 billion.
This is still a small amount compared to the overall asset pool, but it is very likely that this institutional adoption is only going to increase, especially as major insurers and financial services like MassMutual and PayPal are making bold investments to secure their turf in the crypto sphere.
The institutional effect is also visible given the growth in the number of “Bitcoin whales,” or addresses that hold more than 1000 bitcoins. Coindesk has reported that this growth has been picking up speed, suggesting that more and more major financial players are embracing large crypto asset portfolios. Maybe we will see a whole new class of crypto billionaires on the scene by 2025.
2. Regulation is coming
Given such institutional spread, it is unsurprising that we are seeing a corresponding explosion in regulatory efforts. If recent years have taught us anything, it is that increasing regulatory clarity and sophistication is on the way, if it isn’t already here.
The most important battleground for this is undoubtedly the United States, where legal and regulatory battles are picking up steam.
This started in 2020, when the U.S. Securities and Exchange Commission (SEC) began to investigate the precise legal definition of crypto assets, attempting to clarify whether they should be considered a ‘security’ or ‘commodity.’
Most famously, the SEC investigated the crypto company Ripple Labs for over a year, concerning their $1.3 billion sale of XRP cryptocurrency to the retail public.
In another well-publicized case, the Commodity Futures Trading Commission (CFTC) brought a civil enforcement action against the popular crypto exchange BitMEX, specifically over an alleged lack of legal registration and flouting anti-money laundering laws.
And last year, President Biden gave his blessing for an investigation into how to formally bring crypto assets over to the normal, regulated marketplace.
Outside of the United States, the conversation around crypto regulation has extended into pretty much every continent, with each country taking its own unique approach to negotiating the financial and legal landscape surrounding cryptocurrency. Countries in South America, Sub-Saharan Africa, and South Asia are some of the biggest players in all of this, suggesting that these regions might be ahead of the curve when it comes to crypto regulation.
At the moment, governments are mostly asking questions, and there aren’t a whole lot of corresponding answers. But by 2025, it is almost certain that whole new legal infrastructures will be in place.
3. Stablecoins and CBDCs taking over the crypto ecosystem?
Related to this push for regulation, stablecoins and Central Bank Digital Currencies (CBDCs) look set to take on a new dominant role in crypto. Stablecoins are cryptocurrencies pegged to a stable reserve asset, like USD or gold.
Tether was the first major stablecoin and is still by far the most valuable, with a total market cap of around $80 billion. It is pegged to the USD, meaning that 1 Tether is always redeemable for 1 dollar (at least in theory).
And while Tether has faced intense legal challenges and liquidity issues, compared to the volatility of the regular crypto market the relative price stability of stablecoins is increasingly attractive. Especially in the current BTC bear market, this attraction is likely only going to increase, even if some of the legal specifics need fine-tuning.
Concurrently, central bankers in many countries are trying to undercut the potential threat of anonymous crypto assets like Bitcoin or Ethereum by issuing CBDCs, which are essentially digital government-backed equivalents of real-world fiat currencies.
Some major examples include People’s Bank of China issuing a digital yuan as part of a two-part trial, the Reserve Bank of India suggesting a gradual rollout of a digital rupee, and Central Bank of Nigeria’s pilot program of a publicly available eNaira.
By 2025, it is fully possible that every major economy will have its own digital currency of some kind, revolutionizing global economics and proving that digital currencies can be a good investment. This would also entrench the influence of blockchain technology.
4. Growing interest in DeFi
Alongside the rising popularity of cryptocurrency is a growing interest in the broader concept of ‘Decentralized Finance,’ or DeFi. In the last five years, internet search interest in ‘DeFi’ increased by a whopping 5,300%.
DeFi is the concept of financial service without intermediaries or transaction fees, using blockchain to bring users, traders and customers into organic marketplaces. Many cryptocurrencies and crypto exchanges operate through DeFi systems of some sort, but the concept is now starting to incorporate more traditional financial transactions and services.
People are now securing mortgages or loans through DeFi, or creating whole new asset derivatives without formal institutional involvement.
One measure of this growth is watching Total Value Locked (TVL), which is the total value of cryptocurrencies that are ‘locked’ to a DeFi contract. TVL totals went from around $1 billion in late 2019 to $100 billion by the end of 2021.
Another example of DeFi is yield farming, where crypto assets are locked in order to accumulate interest or new crypto assets for their owner(s). Compound is probably the most successful yield farming platform, allowing its users to accumulate strong interest rates from a larger pool of assets.
Other platforms like Crypto.com are increasingly morphing into traditional online banking providers, offering all kinds of services on top of crypto trading.
In short, crypto is changing, filling perceived gaps in the financial ecosystem and becoming more broadly useful.
5. The rise of NFTs
Non-fungible tokens, or NFTs, are essentially digital claims to a unique object or asset, which can be either digital or physical. They are called ‘non-fungible’ because unlike fungible tokens (such as Bitcoin) they are unique and generally cannot be broken up into smaller pieces.
NFTs are mostly created on the Ethereum blockchain, and what makes them unique is that they have embedded smart contracts that describe the product they represent as well as its creator.
Interest in NFTs has truly taken off, with Google search interest growing 3,300% in last five years, and NFTs expanding into almost all areas of art and culture. Indeed, some observers have noted that NFTs are solving long-standing problems in the art community, making it easier to identify ownership and issue royalties accordingly.
Even major auction houses like Christie’s are getting involved, as they auctioned off an NFT-linked physical portrait for $130,000 in October 2020, and sold a purely digital artwork (called ‘Beeple’s opus’) in March of 2021
Although difficult to precisely quantify, NFTs clearly make up a multi-million dollar industry. They are often confusing and controversial, but based on current trends they will become the main cultural fountainhead of the crypto sphere by 2025, influencing trends and fashions more directly than the coins themselves.
6. The market for DApps is on the rise
Lastly, we need to acknowledge decentralized applications (DApps), which are software apps that run on a distributed peer-to-peer (P2P) network.
Many DApps run on the Ethereum blockchain and offer some kind of DeFi functionality. They are distinct from regular crypto wallets or cryptocurrency exchanges because they offer some particular service beyond the usual trading options.
One good example is Upland, a metaverse game based on the ESO blockchain that allows its players to buy, sell, and build virtual properties, earning crypto assets or USD in the exchange. Here, DeFi is being used to power an online community that simultaneously offers the appeal of trading and open-world gaming.
DAppRadar estimates that total DApp transaction volume has increased to $271 billion in 2020, which makes up a huge proportion of the overall crypto space.
DApps are still a growing and changing phenomenon and they indicate that people are finding new and increasingly innovative ways to utilize DeFi principles. This trend will surely shape the crypto world in the next three years.
Trying to predict the future is always treacherous. The cryptocurrency market is particularly unpredictable, with technological and legal innovations popping up seemingly every other day.
But even with the current bearish environment, it is clear that crypto, in one form or another, is now a permanent aspect of the world’s financial and societal ecosystem.
It is therefore important that we all continue to watch the trends, monitor price forecasts, and educate ourselves on new changes as best we can.