5MF [SPECIAL EDITION]: THE MOST IMPACTFUL TRENDS IN 2021
Editorial note: Please enjoy our end-of-year edition where we’ve reviewed some of Finance 2.0’s most impactful trends of 2021, as opposed to our weekly recap. Admittedly, you might need more than 5 minutes for this one (but it’ll be worth it, we promise). Happy New Year and best of luck in 2022!
The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s look at the most significant trends of 2021:
- Despite Failing to Hit $100k, BTC Made Incredible Progress
- The Rise of NFTs: Beyond Rock.jpeg
- Web3 vs. Big Tech
- Layer-1 Blockchain Landscape: Ethereum’s Competitors
- Lessons from PFOF, and a Potential Ban in the US
Bitcoin’s Wild Ride in 2021: An ATH, the Great Migration, and Balance Sheets Galore
What lessons have we learned from Bitcoin’s price moves in 2021?
At the beginning of the year, Mike Novogratz of Galaxy Digital, a crypto hedge fund, forecasted the price of BTC to reach $65k. Bloomberg analyst Mike McGlone placed it at $50k, while Citi senior analysts were the most optimistic, forecasting $300k by the year’s end. The famous Bitcoin stock-to-flow (S2F) model, created by Dutch crypto analyst known as PlanB, painted a $100k target.
For a time, it seemed this was coming to fruition on November 10 when BTC hit an ATH of $68,789. However, one can easily forget that whenever BTC reaches a high profit margin, a selling pressure is created. Such pressure points were more prominent in 2021 than ever before. Although Elon Musk’s tweets contributed to Bitcoin’s May crash, when it dropped by 40%, it was China’s FUD that set the stage for a continuous selloff pressure.
Just when BTC was bottoming on May 18th, Reuters published an all-out crypto ban across China on the same day. Image courtesy of TradingView.com.
In short, Chinese investors started to divest from Bitcoin, both as a crypto asset and as a mining operation. With subsequent crypto mining bans, China made it clear there is only room for one form of money — the digital yuan (which, by the way, has now been used by more than 139 million people). Yet, despite the new selloff pressure, this also meant that the perennial China FUD would finally cease to matter.
The power of China’s FUD fizzled out when its BTC mining share dropped from 70% dominance to under 40%. Image courtesy of ccaf.io.
Prior to the Great Migration, at least 70% of Bitcoin mining took place in China. Therefore, such a steep fall from Chinese grace signified a major bullish trajectory for Bitcoin, as it properly decentralized — removing what many considered to be one of the few remaining threats to Bitcoin. At the same time, major institutional investors, such as Grayscale and MicroStrategy kept erecting buy wall pressure. MSTR alone had increased its BTC holdings from December 2020 to December 2021 by 76.5%, from 70,470 BTC to 124,391 BTC.
Demonstrating total Bitcoin mainstreaming further, 650 US commercial banks are on a fast track to integrate digital assets in their offering. However, the launch of the first futures-based Bitcoin ETF in the US was met with suspicion, as it would open the door to open interest speculation. Although this did lead to major liquidation events, a growing list of publicly traded companies see Bitcoin as a worthy treasury reserve asset:
- Microstrategy: 124,391 BTC (source)
- Tesla: 42,902 BTC (source)
- Galaxy Digital Holdings: 16,400 BTC (source)
- Voyager Digital LTD: 12,260 BTC (source)
- Square Inc. (now ‘Block’): 8,207 BTC (source)
Moving to the present and beyond, what can one expect from Bitcoin? First of all, the Lightning Network (LN) is continuing its mission of transforming BTC into a low-fee, near-instant payment system. Think VISA but decentralized and independent from central banking. In 2021, LN’s capacity increased by 433%. While Bitcoin has swayed from its original vision of a ‘peer-to-peer electronic cash system’, the Lightning Network is inching closer to restoring Satoshi’s view.
Lastly, the forecasted Fed interest rate hikes may be an opportunity for us to find out what Bitcoin really is — a tech stock, a digital gold inflation hedge, or something else. Market analyst Caleb Franzen posits that, due to high historical correlation between BTC and treasury yields, the same may turn out true with higher interest rates. Meaning, if the Fed follows through with raising rates, the price of BTC price could also increase.
Moreover, based on the bursting of the dot com bubble in 2001, when the Fed raised interest rates, we may see a similar scenario in play. Yet, no one knows how the crypto market sentiment will interplay with Bitcoin. Is Bitcoin a tech stock — i.e. a risk-on asset that will almost inevitably fall as rates rise? Or is Bitcoin something else? Franzen likes the latter.
Here’s what we do know: Bitcoin is technologically outside the stock market and the Fed. If both fail to deliver, investors are likely to turn their eye elsewhere as a safe haven — and that could be Bitcoin.
NFTs: From a Joke to a Metaverse Tokenization System
2021 began with a new asset class — non-fungible tokens (NFTs). Although the concept itself started in 2014 with an NFT dubbed Quantum on the Namecoin blockchain, it took 7 years for NFT mainstream to lift off. Many still can’t quite grasp why NFTs are popular. After all, can’t you just right-click and save them?
By reaching the ‘first-ever NFT’ scarcity level, Quantum attained a lofty $1.4 million price tag at Sotheby’s auction in 2021. Image courtesy of Sotheby’s.
There are many ways to tackle this befuddlement, but they all rely on NFT’s core feature: smart contract programmability. In other words, blockchain gives NFTs, as ERC-721 tokens, properties of its own — immutability and security — so they become more than mere digital files. From this core feature, we arrive at ownership provenance.
Then, because of their visual nature, which can be seamlessly employed via social media avatars, a social status is tied to NFT ownership. Adding on top of that is artist liberation. Never before has it been so easy to mint digital artwork, set up royalties, and wait for a smart contract to automatically do its thing — start generating passive income from the secondary sales market.
Prior to 2021, the NFT market had negligible trading volume, reaching its peak in August at $1.05 billion. Image courtesy of The Block.
This dynamic led to many bombastic, hard-to-believe NFT sales. In turn, such headlines spurred even greater interest, creating the FOMO (fear of missing out) effect. Here are just a few of the NFT heavyweights capturing people’s attention in 2021:
- Sllytune, the same person who bought Quantum for $1.4 million, also bought a CryptoPunk NFT for $11.7 million in June. (source)
- CGI artist Beeple upped the game for everyone with his record-breaking NFT The First 5000 Days, selling for $69.3 million at Christie’s. (source)
- Beeple once again rose to the top in November with HUMAN ONE NFT, selling for $28.98 million. (source)
- The current record-holder, Pak’s The Merge, with NFTs as dots that lose ‘weight’ when merged. Altogether, nearly 29k dots were bought for around $91.8 million. (source)
For the most part, generative NFT art based around randomized core attributes became a staple for NFT collections. Yet, this is only the beginning of NFT use-cases. Axie Infinity, a tactical blockchain game, broke the ground by turning playable creatures, Axies, into NFTs. Revolving around Axie breeding and evolution, a dual-token ecosystem emerged.
Second only to the top NFT marketplace (OpenSea at $13.25 billion) Axie Infinity is the NFT/GameFi king at $3.81 billion trading volume and over $1.26 billion in revenue. Image courtesy of AxieWorld.com.
From this stellar success, Axie Infinity set the standard for GameFi, combining gaming with DeFi by making tokenized in-game assets tradeable for real money. Now, everyone, and their dog, wants to become the next Axie. Virtual land plots, as NFTs, have been selling left and right after Facebook became ‘Meta’ at the end of October, signaling the age of the metaverse.
Many open-world blockchain games — metaverses — have popped up in 2021, selling land plot NFTs for exorbitant sums. Each land plot provides a path to becoming a virtual land lord who stakes such NFTs for passive income. Image courtesy of dappradar.com, November 30, 2021.
It is safe to say that gaming is forever changing. With all things equal, such as gameplay and visuals, if one has a chance to pick a blockchain game over a non-blockchain game, the inherent play-to-earn (P2E) potential is poised to only boost the popularity of blockchain gaming — and therefore NFTs. Canadian video-gaming giant, Ubisoft, with a market cap of $5.94 Billion, knows this well.
Despite the initial backlash for tokenizing its fully-priced game with cosmetic NFTs, the company is forging full steam ahead with its Quartz NFT marketplace for Digits NFTs. Likewise, major sportswear corporations, Adidas and Nike, are innovating the space and are speculated to eventually launch a ‘Wear-to-Earn’ model. It’s hard to believe that within a single year, the NFT space has evolved so much.
It only goes to show that smart contract programmability will continue to push the envelope, whether it is in the arena of fantasy sports, trading cards, gaming, marketing, artist royalties, or copyright protection. Even something as ordinary as basketball tickets can become collectible NFTs with extra perks — and Mark Cuban plans to implement exactly that with his NBA team, the Dallas Mavericks.
Animated storyboard “2974 Collection” consists of Stephen Curry’s play-by-play action to celebrate the Golden State Warriors’ superb performance this year. Image courtesy of 2974SC.com.
One thing is for certain, NFTs are way past being the butt of a joke.
Is Web3 Becoming a Serious Threat to Big Tech?
Imagine the internet as a blockchain network with half a dozen node operators. Would you say it’s centralized? If so, would you prefer an alternative? Well, that’s exactly the current state of the internet. Although it doesn’t have blockchain nodes, it does have data control points in the form of Amazon AWS, Alphabet (Google), Facebook (Meta), Microsoft, Apple, and Twitter.
Image courtesy of Statista.com.
Some Big Tech giants exert their control through obscure moderation and app stores, while others leverage the flow of data and information. Case in point, Amazon’s AWS hosts one third of the internet’s cloud infrastructure, while Google’s search engine accounts for 91% of searches worldwide.
In fact, the last time Google suffered a severe outage in 2013, 40% of the internet traffic went down with it. Suffice to say, the present internet is beginning to mirror the 1960s, when people had access to three TV channels. Fixing it means going back to decentralized and open-source Web1, but with modern Web2 web protocols.
And that’s Web3 in a nutshell, a bridge between Web1 and Web2. To make it happen, the first order of business is to tokenize decentralized network ownership. MetaMask, as a browser extension cryptocurrency wallet, provides that first step into the world of blockchain interoperability.
By seamlessly connecting dApps while browsing the internet, MetaMask was rewarded by user growth explosion during 2021. Image courtesy of consensys.net.
Other Web3 cogs are beginning to emerge. For instance, an NFT marketplace like Rarible has its governance token RARI, giving you the power to vote and propose changes to the platform. Likewise, the AXS token in Axie Infinity can be used for the dual purpose of staking and voting.
Web3’s early days also offer answers to problems like YouTube’s demonetization. Livepeer network incentivizes users to lend their GPU and bandwidth power with LPT tokens. This way, each stakeholder provides the infrastructure, currently spread across 70k GPUs, for content streaming.
When we see that LPT has appreciated by over 2,600% since January, it’s clear that Web3 services are high in demand. However, we are just in the initial Web3 stage, as shown by the number of daily active users across total dApps:
During 2021, 378 new dApps launched. dApps are simply web interfaces that tap into smart contracts. Image courtesy of stateofthedapps.com.
In the coming years, cross-chain interoperability will be critical to enable smooth Web3 sailing. Web3 Foundation’s flagship project, Polkadot, has been developed for that exact purpose, while Moonriver (MOVR) will serve as a smart contract platform to quickly import Ethereum-based smart contracts.
After all, Ethereum hosts 76% of total dApps across all active blockchains. With three elements aligned — dApps, cross-chain operability, and user-friendly interfaces — Web3 is poised to create a network of networks as a hard counter to Big Tech.
While the representative of the current order, Jack Dorsey, may dislike the weight of Venture Capital (VC) firms in the Web3 space, no other alternative is on the table, for now.
Enjoy 5MF? Click to forward it to three friends.
Layer-1 Blockchain Landscape: Ethereum Has Serious Competitors
If you’ve paid gas, chances are you see Ethereum as a bitter-sweet blockchain project. As noted previously, Ethereum’s dApps do make 76% of all blockchain dApps, and its gross value locked inside smart contracts is $152.3 billion vs. the next 6 competitive blockchains combined at $67 billion. That anticipation of network dominance is the sweet part.
Gross value locked within major smart contract blockchains. Image courtesy of The Block.
Yet, the bitter part keeps souring investors whenever they actually use Ethereum. Its significant market share as a smart contract platform makes Ethereum a big piece of the Web3 puzzle. Unfortunately, thanks to both volatile and exceedingly high transaction fees, Ethereum restricts access to millions of onboarders.
Ethereum’s transaction fees are exponentially higher than newer, competitor platforms. Image courtesy of cointool.app.
So why do users continue to use Ethereum, if significantly cheaper options are available? Well, Ethereum was the very first general purpose blockchain built — so there’s certainly a first mover advantage at play. But, we all remember how that worked for MySpace. Facebook beat MySpace due to its innovative drive and constant push for new features.
We don’t know if something similar will happen to Ethereum — it’s too early to tell. But, Ethereum still has more total developers than any other blockchain.
Then again, just one year in the blockchain space can make an incredible difference. Not only did Solana’s token appreciate by 11,336% since January, but its developer activity ballooned as well, overthrowing Ethereum. Even more so, while Solana (SOL) has taken the lead, both Polkadot (DOT) and Cardano (ADA) have a higher development activity than Ethereum (ETH).
Measuring within a 7-day interval, 2021 marks a completely different developer distribution from the prior Ethereum dominance (Cardano — green, Polkadot — pink, Ethereum — blue, Solana — red). Image courtesy of Santiment.net.
On the other hand, one can interpret this data as a prelude to Ethereum’s docking to Beacon Chain in the second half of 2022, marking its transition to a full ETH 2.0 Proof-of-Stake blockchain, dubbed the Serenity phase. It is anyone’s guess if this will have the effect of creating competitive transaction fees. After all, the shard chain upgrade, for increasing scalability and capacity, is not scheduled until 2023.
In the meantime, Ethereum can count on Layer 2 scaffolding to pull the traffic weight. Arbitrum, Polygon and Loopring are already making ETH gas fees drastically lower, although they do represent extra steps of inconvenience. Until then, Solana (SOL) and Terra (LUNA) already offer near-instant transfer speeds. By the same token, all major smart contract competitors to Ethereum have negligible fees.
In the end, Ethereum is treading on a tightrope, but its formidable dApp legacy and talent pool is nothing to overlook. We should see the ETH 2.0 upgrade in full swing in 2022, which will likely decide the fate of Ethereum.
Is the End of PFOF in Sight?
Both AMC Entertainment (AMC) and GameStop (GME) were hit by the same invisible enemy. The one that dislikes social gatherings and going out to physical stores. Correspondingly, AMC’s revenue dropped 90% by Q3 2020, while GME suffered a 30% drop in sales during the same period. With looming, short-selling hedge funds ahead, retail traders came to the rescue, giving both companies a second wind.
From the brink of bankruptcy to massive gains the following year, it is no wonder AMC (orange) and GME (blue) are main stars of upcoming documentaries and TV shows. Image courtesy of Yahoo Finance.
From Melvin Capital and Point72 to Light Street Capital and Citron Capital, short sellers suffered a $19.75 billion loss in January alone. The GameStop squeeze was so forceful that it even squeezed White Square Capital out of business. Yet, such losses pale in comparison to the great post-reveal.
Having implemented unforeseen trading restrictions on GME and AMC at the height of the initial squeeze, many brokerages have been tainted, with Robinhood at the center of suspicion. Although one portion of the first class-action lawsuit against Robinhood and Citadel Securities has been dismissed in Florida, others are still pending.
What is more important, however, is to address the core issue — payment for order flows (PFOF). Such a model creates a business relationship between a market maker and a broker, where the latter receives revenue by selling order flows to market makers. For this heightened conflict of interest, the PFOF business model is banned in the UK and Canada.
Revenue generated from PFOF by major stock brokers. Image courtesy of Barrons.com.
However, there doesn’t seem to be much interest in banning the practice in the US. Even a change.org petition hasn’t reached the 75,000 signature threshold since October. In the meantime, the EU announced on November 25th a PFOF ban, without any public pressure to do so. Although Gary Gensler, the SEC Chair, did say such a ban is on the table due to a ‘potential conflict of interest’ at play, there is another take on the issue.
Sen. Pat Toomey, traditionally friendly to digital assets, introduced the Investor Freedom Act of 2021 to prevent a PFOF ban altogether. According to Toomey, near-zero cost trading pioneered by Robinhood wouldn’t have been possible without PFOF. If we go by the petition’s result, it seems retail traders agree with Toomey, prioritizing affordability over the potential conflict of interest.
Tweets of the Week
The best way to combat wealth inequality in the US is to allow citizens to copy Nancy Pelosi’s trades in real-time
$50K-$200K 1 standard deviation band feels wide. Some people think this makes S2F model invalid and not useful, but is it?
Last cycle S2F model average was $7K with a 1sd band of $3.5K-$14K. Not wide from current $50K perspective.
Next cycle band will be $0.5M-$2M .. useful IMO
MicroStrategy has purchased an additional 1,914 bitcoins for ~$94.2 million in cash at an average price of ~$49,229 per #bitcoin.
As of 12/29/21 we #hodl ~124,391 bitcoins acquired for ~$3.75 billion at an average price of ~$30,159 per bitcoin. $MSTR
Deflationists were wrong about a lot of 2021, but one thing they were right about is that this inflation is different than the 1970s. It’s fiscal-driven rather than bank-lending-driven inflation.
Most of them didn’t expect how much inflation fiscal spending could cause.
tough times seeing how eth has crashed down to $3,600 from $735 a year ago
Join Five Minute Finance Newsletter.
