CICC Research Report: What changes have taken place in the cryptocurrency world over the past year?

Source: China International Capital Corporation

In 2020, we have seen a huge change in the ecosystem (cryptocurrency circle) surrounding digital assets such as Bitcoin. The most direct feeling is that the price of Bitcoin has risen nearly 3 times in the past year, reaching a record high of US$27,000, and the issuance scale of stablecoins has increased 3.5 times, reaching a record high of US$27 billion. We believe that (1) the increasingly clear regulatory policies of various countries on digital assets, (2) the emergence of financial products/channels such as GBTC and PayPal, which have lowered the entry threshold for traditional investors to invest in digital assets, and (3) the rise of decentralized financial services based on blockchain are the three internal factors driving the development of Bitcoin and stablecoins. In the short term, digital asset prices will certainly fluctuate greatly due to factors such as market liquidity, but in the long run, digital assets and blockchain-based financial services are expected to achieve sustained growth. For details, please refer to our in-depth report "Blockchain and Digital Currency: How Technology Reshapes Financial Infrastructure" released in October 2019.

Traditional investors continue to join, driving Bitcoin's price up nearly 3 times in a year

The price of Bitcoin has risen nearly three times. The price of Bitcoin has risen from $7,200 at the end of 2019 to $27,084 (as of 2020/12/28), an increase of nearly three times, and has become the asset class with the highest increase since the beginning of the year, even surpassing the FAAMNG technology giant index. In addition to the impact of global liquidity easing, we believe that the financial innovation of financial institutions represented by PayPal, Robinhood, and Grayscale in broadening digital asset channels in the past year is the structural reason behind the nearly three-fold increase in the price of the currency in the past year. In the short term, the price of the currency may fluctuate greatly due to liquidity and the inflow and outflow of speculative funds, but in the long run, the continuous expansion of the traditional investor base is conducive to the stable rise in the prices of digital assets such as Bitcoin.

Chart: Performance of major asset classes since the beginning of the year

Source: Bloomberg, CICC Research Department Note: Data as of 2020/12/28

Chart: Bitcoin price and average daily trading volume since January 2014

Source: CoinMarketCap, CICC Research

The scale of stablecoins has expanded by 3.5 times. In the past year, the total issuance scale of stablecoins represented by USDT has increased by 3.5 times from US$6 billion at the end of 2019 to US$27 billion. We believe that the rapid development of decentralized applications (DApps) based on Ethereum, represented by financial services such as collateralized lending (MakerDAO) and decentralized exchanges (Uniswap), has driven the continued rise in demand for stablecoins. Looking ahead to 2021, we believe that the status of stablecoins such as USDT as a universal means of payment in digital asset transactions will be increasingly consolidated. However, whether global stablecoins (GSCs) such as Libra can be commercially used on a large scale remains to be seen.

Chart: Changes in the size of stablecoins since January 2015

Source: Coin Metrics, CICC Research

Digital asset regulatory policies are becoming increasingly clear, and new regulations in Hong Kong, China and Singapore are expected to promote the rapid development of compliant exchanges

Over the past year, the Group of Twenty (G20) has taken the lead in formulating a regulatory framework for GSC (global stablecoins) represented by Libra to prevent financial risks. In 2019, the Securities and Futures Commission of Hong Kong, China formulated regulatory rules for licensed asset management companies that invest in virtual assets, and issued the first crypto asset exchange license (License No. 1 (Securities Trading) and License No. 7 (Providing Automated Trading Services)) to OSL in December 2020. Singapore has formulated the Payments Act, which has laid the foundation for the development of digital asset-related financial services such as exchanges, asset management companies, and OTC in Singapore.

Chart: Current regulatory attitudes towards crypto assets in various countries (as of December 2020)

Source: Interchain Pulse, CICC Research Department

Digital asset investment channels: from Coinbase, Huobi to GBTC, PayPal

In the past, the buying and selling of digital assets needed to go through professional exchanges such as Coinbase, which had high barriers to entry and insufficient investor protection. Over the past year, we have seen Grayscale launch the BTC Trust GBTC, as well as Bitcoin trading services launched by well-known payment/securities trading platforms such as PayPal and Rohinhood, which have greatly lowered the threshold for institutional and retail investors to invest in digital assets. According to Grayscale's official website, GBTC's AUM has reached 14 billion US dollars. From the end of last year to November 30, 2020, GBTC's new Bitcoin holdings accounted for 65% of the newly mined Bitcoin in the entire market. Traditional institutions such as Fidelity and DBS have also established digital asset service platforms. Traditional financial institutions are gradually becoming important participants in Bitcoin investment.

► The emergence of trust investment products represented by Grayscale GBTC allows investors to participate in investment without worrying about the storage and security of encrypted assets. At the same time, GBTC is listed on the OTC market and disclosed to the SEC on a regular basis, which improves the liquidity and transparency of the product and provides a convenient entry channel for American investors.

► PayPal (payment software), Robinhood (stock trading software), and other end players with great influence in the financial payment field, have cooperated with compliant crypto asset brokers to open trading interfaces to users and hold crypto assets for users, allowing a large number of users to access crypto assets with one click without opening additional accounts, thus lowering the investment threshold.

Chart: Business landscape of digital asset entry channels

Source: CICC Research Department

Chart: Grayscale Bitcoin Trust holdings since January 2020

Source: The Block, CICC Research Department

Chart: GBTC Schematic

Source: Chain Hill Capital, CICC Research

Chart: User purchases Bitcoin on PayPal

Source: PayPal, CICC Research

Ethereum has entered a new stage of development and has become the most active public chain network

The Ethereum ecosystem is maturing, and financial services are becoming mainstream. Unlike Bitcoin, which is mainly used as a digital asset, Ethereum supports smart contracts, PoS and other functions, and is suitable for developing distributed applications based on blockchain. Over the past year, we have seen the rapid maturity of the Ethereum ecosystem. The average daily transaction volume of the Ethereum ecosystem has increased by 90% in the past year. Financial services such as MakerDAO (decentralized lending) and Uniswap (decentralized exchanges) have also become mainstream applications of the Ethereum ecosystem. Although the legal status of decentralized finance (DeFi) is not yet clear, the development in the past year has shown efficient and transparent technical advantages. Whether it can become an important supplement to traditional finance in the future remains to be seen.

Chart: Since December 2019, the proportion of various types of Ethereum applications has gradually changed

Source: State of the DApps, CICC Research

Chart: Top 10 Ethereum applications from October 2019 to December 2020

Source: State of the DApps, DAppTotal, CICC Research

Chart: Ethereum's main development history and historical prices

Source: CoinDesk, CICC Research

Chart: Total number of Ethereum addresses and average daily active addresses since 2019

Source: Etherscan, Coin Metrics, CICC Research

Chart: Average daily number of Ethereum on-chain transactions since January 2019

Source: Etherscan, CICC Research Department

Chart: Ethereum transaction fees have exceeded Bitcoin for 6 consecutive months

Source: Coin Metrics, CICC Research

Mining machines: From 16nm to 7nm, from one dominant company to two dominant companies

Chart: Performance evolution of mainstream mining machines

Source: Zhongguancun Online, CICC Research Department

Chart: Market share of ASIC mining machine manufacturers from 2017 to 2019 (calculated by TH/s sold)

Source: BitMEX Research, CICC Research

risk

Risk of cryptocurrency price fluctuations; risk of digital currency and blockchain regulation; blockchain application implementation failing to meet expectations.

Article Source

This article is excerpted from: "Blockchain and Digital Currency: What Changes Have Happened in the Cryptocurrency Circle in the Past Year" published on December 30, 2020

Analyst Huang Leping SAC Practice Certificate No.: S0080518070001 SFC CE Ref: AUZ066

Contact: Wei Xin SAC Practice Certificate No.: S0080119110024

Contact: Liu Yunchang SAC Practice Certificate No.: S0080120080146