In 2020, crypto cemented its status as an institutional asset class. Coinbase had a front-row seat to this development — facilitating trading, custodial, and lending activities for many of the world's investment firms, corporates, banks, fintechs, and wealth managers.
2020 in Review
In 2020, crypto cemented its status as an institutional asset class. Coinbase had a front-row seat to this development.
|Jan 22, 2021|
In 2020 our institutional clients invested in Bitcoin for a range of reasons, including as a store of value, as an inflation hedge and/or insurance against new potential monetary policy risks, as a portfolio diversification tool and as a treasury reserve asset.
Bitcoin moved decisively higher in 2020. Achieving a 321% return since January 1, the BTC/USD pair broke out of its post-2017 trading range and ended the year at $29,185, persuading many investors that it is here for the long term.
The case for owning Ethereum we hear most frequently from our clients is a combination of i) its evolving potential as a store of value, and ii) its status as a digital commodity that is required to power transactions on its network.
While our institutional clients predominantly bought Bitcoin in 2020, a growing number also took positions in Ethereum, the second largest crypto asset by market capitalization. Ethereum performed well against USD in 2020, outpacing Bitcoin to finish the year up 487% at $745.
We expect that stablecoin growth will continue as more people enter the cryptoeconomy and seek to move assets efficiently and cheaply between exchanges and smart contracts. Similarly, we believe the growth of DeFi will directly drive usage of stablecoins, as they are the only viable mechanism for using fiat currency as collateral or part of a trading pair within DeFi.
Cryptodollars continued to grow in 2020. Tether and USDC remained the dominant assets, with Tether’s market capitalization increasing by 350% from $4.75 billion to $21.4 billion (inclusive of its Ethereum, Omni, and Tron formats) and USDC increasing by 655% from $518 million to $3.91 billion.
The regulatory landscape in crypto continues to evolve. In 2020 the market saw heightened activity — particularly from federal U.S. regulators including the Department of the Treasury’s Office of the Comptroller of the Currency (OCC) and Financial Crimes Enforcement Network (FinCEN), the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the U.S. Department of Justice (DOJ).
While institutional market participants’ reactions to specific regulations remain mixed, the industry generally embraced moves in 2020 towards more precise guidelines on how crypto businesses can operate legally and fairly. Coinbase and others already provide safe, regulated onramps to the crypto markets for institutional clients. Additional guidelines from regulators take this trust one step further by clarifying the legality of various actions and the standing of specific assets.
Outside a select group of venture capital funds and family offices, we have not yet seen significant investment in DeFi assets from our institutional clients in 2020 — this part of the crypto asset class remains primarily retail-driven.
As in the early days of Bitcoin adoption, reliable and compliant tools for accessing DeFi protocols are hard to find, and maturity will take time (most DeFi protocols are less than two years old). However, given the large market opportunity to recreate financial services with efficient, open-source DeFi markets, it’s reasonable to expect reliable “bridges” to DeFi to be built in coming years. We can imagine a future in which institutional investors can access both traditional and decentralized financial services through trusted, regulated onramps.
Coinbase Institutional is an integrated solution that marries our custody, advanced trading platform and prime services. Our unified investing experience has the tools sophisticated investors need to execute large and complex trades, complemented by a diverse pool of liquidity. Working on an agency basis helps us assure clients that our interests are aligned as we seek to find the best prices available in the market. Once trading is complete, Coinbase Custody is one of the safest places to store digital assets, which are segregated and held in trust for the benefit of our clients.
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