Bitcoin and crypto face an even wilder ride in 2021

The world at the beginning of 2021 is almost unrecognisable from the global situation 12 months ago. The coronavirus pandemic has upset the economic status quo and Donald Trump's virulent brand of populism, last year apparently poised for four more years of growth, seems to have been halted in its tracks.

But under the tumultuous headlines, the same currents that have carried the world over the last decade can be felt: the importance and relevance of the digital is fast catching up to the physical, the developed world is increasingly addicted to borrowing, and geographic boundaries are eroding.

These undercurrents suggest that bitcoin, the world's only scarce digital asset that exists solely in the borderless virtual dimension, is likely to become increasingly important even as established powers, from the US Federal Reserve to the Chinese Communist Party, try to contain it.

As a result of bitcoin’s mammoth 2020 bull run, pushing the bitcoin price from under $4,000 during the March coronavirus crash to around $30,000 by the end of the year, bitcoin is back at the forefront of the global consciousness.

After billionaire hedge fund manager Paul Tudor Jones named bitcoin the "fastest horse" in the race to beat inflation in May last year, a raft of big-name and institutional investors piled into bitcoin through 2020.

This, combined with increased bitcoin and cryptocurrency acceptance from the likes of PayPal, has caused a bitcoin and cryptocurrency boom that the UK financial watchdog has already warned investors not to get too excited about.

In the US, proposed new Treasury regulations intending to stamp out illicit bitcoin transactions could push cryptocurrency service providers underground or undermine their utility. Coinbase’s planned IPO, intended to legitimise the cryptocurrency industry, currently looks likely to be the setting for a showdown between the Andreessen Horowitz-backed company, valued at $8 billion in its last 2018 funding round, and the US regulators.

As the popularity of bitcoin and cryptocurrencies grows, both as a speculative bet and as an alternative to the traditional financial system, regulators will increasingly apply pressure to the industry – and may stifle it entirely.

The rise of cryptocurrency and blockchain technology has already had a marked influence on central bank monetary policy and the financial system. China’s blockchain-based digital yuan and Facebook’s bitcoin-inspired Libra-turned-Diem forced the digital currency issue in 2020, with central banks now rushing to fill the void before the private sector beats them to it.

Stablecoins – those pegged to a commodity or currency – and central bank digital currencies are, at the start of 2021, still a peripheral issue but may not be by the year’s end. Their development and adoption will give legitimacy to bitcoin and other decentralised cryptocurrencies, while at the same time undermining their broader utility.

However, a fully-fledged digital dollar poses an existential threat to the commercial banking industry. The financial technology banks have developed over the last decade in the form of apps and robo-advisors may be adopted by the state, giving central banks the ability to connect to citizens directly for the first time.

Bitcoin’s blockchain technology, following the mania that swept the world in 2017, might finally find a use beyond cryptocurrencies in 2021.

The polarisation of both traditional and social media, culminating in the sitting US President being forcibly ejected from the de facto public policy announcement platform, Twitter, and the near-erasure of 'free speech' app Parler, has created demand for a non-partisan digital platform.

Bitcoin and cryptocurrency advocates who believe in the democratising power of the blockchain, are well-positioned, well-funded, and philosophically motivated to create one. A number of attempts are in the works at various stages of development.

The problem, as bitcoin’s mysterious creator Satoshi Nakamoto wisely foresaw, is that systems intended to be decentralised have a tendency to become centralised while the founder is involved – especially when the creators seek to monetise the technology.

Crypto-libertarians that wish to solve the bias and echo chamber problems facing the likes of Twitter and Facebook cannot approach them as Silicon Valley has over the last two decades – with venture capitalists focused on an IPO or sale – and must put aside the bottom line.

Billy was the founding editor of Verdict. He now writes about all things crypto at Forbes.