Reading time: 8 minutes
‘Bitcoin is a technological tour de force’ – Bill Gates, co-founder of Microsoft, inventor, and philanthropist
In recent years, cryptocurrencies have experienced a roller-coaster ride.
As we approach 2021, bitcoin prices have steamrolled to all-time highs, up by an eye-popping 215 percent, year-to-date, underpinned amid increased investor confidence in the digital currency (see figure 1.A).
The key question for many retail investors going forward is whether they should wait for a correction, or take the plunge in anticipation of an extension beyond fresh all-time pinnacles.
Bitcoin (BTC): The King of the Cryptocurrency Market
Among other factors, the cryptocurrency market’s sentiment can depend on the market valuation of bitcoin.
Correlation between the latter and the largest altcoins (alternative coins) is substantial. Ethereum (ETH), Litecoin (LTC) and Monero (XMR) exhibit a strong positive correlation with BTC, ranging between 70-80 percent year-on-year. Therefore, should the price of bitcoin continue exploring unchartered territory, many altcoins may follow suit, and vice versa for a decline.
Sustained demand for BTC in 2021 is likely. Not only are major online payments systems, namely Square & PayPal, striving to offer BTC options, institutional demand for the virtual currency has increased. JPMorgan’s Global Market Strategy team released a report in November revealing gold ETF institutional investors are shifting to BTC. Another point worth underlining is the anticipated upward shift in overall demand for online payment methods if global recovery from the COVID-19 pandemic is slower than expected.
However, in all uptrends, corrections will form. Despite the fear of missing out (FOMO), prudent investors are unlikely to jump on the cryptocurrency bandwagon at this point. Many will pursue a correction, presenting a possible dip-buying opportunity at cheaper prices.
(Figure 1.A: Cryptocurrencies – TradingView)
Ethereum (ETH) – Another Wonder of Blockchain Technology
Ethereum, bitcoin’s smaller brother (by market cap – CoinMarketCap), is another crypto star of 2020, up more than a whopping 400 percent, year-to-date (see figure 1.A). ETH’s performance has been attributed to a surge of interest in decentralised finance (DeFi).
DeFi focuses on applications referred to as dapps, performing financial functions based on ledger technology. DeFi is used for lending and trading, including derivatives, using the ETH’s network smart contracts technology instead of third parties providing centralised software. Regulators are realising what the market has known for some time – defi is potentially the next step in the evolution of financial instruments.
Traditional financial services activities, insurance and lending-based products, for example, have always been under the watchful eye of a regulatory body since transactions involved use fiat currency. With the new defi ecosystem, more liquidity may be injected into the markets, specifically the cryptocurrency market, as this will allow yield-seeking lenders who wish to remain anonymous to enter the market.
The total value accrued (locked) across all defi projects has surged dramatically this year, from US$700m to a record high of US$14bn. What augurs well for the ether market is most of defi is built on the ETH blockchain network.
Still, this does not increase demand only for ETH. There are other cryptocurrencies used for defi. For example, after BTC and ETH, Dai is the most popular cryptocurrency used for defi. It is pegged to the US dollar, which is why it is often labelled a stablecoin. Accelerated growth in defi demand, therefore, could result in the take-up rate for Dai in 2021.
Ripple (XRP) – Potential to Uproot Existing Electronic Remittance System
Ripple is another popular digital asset, considered by some to be the cousin of bitcoin (by market cap – CoinMarketCap). Although ripple experienced a hefty correction in recent weeks, the crypto remains higher by nearly 200 percent, year-to-date (see figure 1.A).
From its birth in 2012, ripple gained substantial value, resulting in its co-founder, Chris Larsen, being one of the richest men in the United States.
XRP has always aimed to be a remittance network, operating within the existing financial system. This is probably why hundreds of financial institutions choose RippleNet, including giants like HSBC.
By 2024, it is reported the European Union (EU) will put in place a comprehensive framework enabling the uptake of distributed ledger technology (DLT) and crypto assets in the financial sector. Although 2024 may seem a long way off, markets are likely to factor in the XRP integration with the existing financial framework in the short term when calculating XRP’s fair value.
If XRP further enhances its technology, it may eventually replace the current electronic funds transfer system financial institutions use (SWIFT). The mere rumour would likely catapult XRP’s price.
Volatility for cryptocurrencies is likely to remain high in 2021, with many claiming potential for upside is greater than downside.
Rising prices for the top three cryptocurrencies may spark interest in other major cryptocurrencies, such as Litecoin and Bitcoin Cash. This may also tempt investors to dabble in initial coin offerings (ICO) in attempt to maximise profit.
Crypto derivatives, such as crypto CFDs, is also an option worth exploring. With an FP Markets trading account you can access the cryptocurrency market and trade the most popular cryptocurrencies, including Bitcoin, Ethereum, XRP (Ripple), Bitcoin Cash and Litecoin. There is no requirement for a digital wallet and our cryptocurrency CFD trading platforms allow you trade on both rising and falling prices.
DISCLAIMER: The information contained in this material is intended for general advice only. It does not take into account your investment objectives, past performance, financial situation or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com and should be considered before deciding to deal in those products. Derivatives can be high risk; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.