Crypto Revolution in 2017 Is Just the Beginning

When we kicked off 2017, bitcoin had just topped $1,000 for the first time in three years.

It was a signal to the market, but cryptocurrency still lacked serious interest from mainstream banks and institutional investors. Today, we’re looking at a very different market and, as one of the largest liquidity providers in the space, Cumberland has had a front row seat to the evolution — or revolution, depending on your perspective.

Over the last several years, anyone who was following cryptocurrency or involved at all in the markets alluded that "Wall Street" was coming. This was the year we actually saw this start to happen, driven by the new ventures, burgeoning demand and market maturation that generally accompany a rapid run up in price.

Real dollars are put to work

2017 was an inflection point.

We saw a shift from getting familiar with cryptocurrencies to putting real dollars to work — a shift from education to action that was evident throughout the activity we saw in the crypto markets. Bitcoin and other top cryptocurrencies saw their valuations grew consistently over the first half of the year and, as we entered the back half of the year, prices reached all-time highs over and over again, with year-over-year market cap figures growing over 4,000%.

The end-of-the-year headlines are telling the story of volatility (those of us who have been in these markets for some time know that volatility defines them — and, indeed, all nascent markets), but the fact remains we've seen prices up 1500% this year. And demand to invest real, new money has followed.

Realizing that bitcoin is here to stay, CME, CBOE and Nasdaq all announced plans to list bitcoin futures contracts, with a race to get the first product listed. CME and CBOE have already launched and have active market participants.

Historically, adding derivatives to a spot market has been an indication of maturity, and we see these contracts as a natural progression in the expansion of bitcoin (and all cryptocurrencies) as an asset class.

These developments also signal that action will only continue, as futures have been a known precursor to an ETF — and NYSE and CBOE have both announced plans to list. Futures and ETFs are familiar to institutional money, and many investors who have been on the sidelines are using these products to gain exposure to cryptocurrencies.

Market players change face

Bitcoin has always had a diverse group of followers, historically made up of early adopters, crypto-centric companies, individual traders, high net-worth individuals and a small group of institutional traders like Cumberland.

But it's the birth of the crypto-specific hedge fund that has really signaled a trend from education to action among institutional capital. At Cumberland, we saw these funds emerge this year in truly meaningful numbers, from a handful in 2016 to around 70 in the middle part of this year to now more than 120 and growing, a figure which represents approximately 1 percent of all hedge funds globally.

We’re seeing everything from early crypto-enthusiasts who did well for themselves now running funds to the more established funds turning their full-time focus on cryptocurrencies.

From our perspective, it’s a trend that shows no signs of slowing down in 2018.

We're also seeing the changing face of the cryptocurrency investor reflected in the shifting landscape between early crypto movers — let’s call them bitcoin 1.0 — and newer users or bitcoin 2.0.

Both groups are ultimately trying to achieve the same goal – making bitcoin scalable, secure and usable, and making it the largest decentralized network for the movement of value. We have seen some significant developments over the last year which brought about different solutions, with one ultimately creating bitcoin cash. It remains to be seen which philosophy will come out on top and what that means for the continued mainstreaming of the asset.

Ecosystem builds on bitcoin

We also saw a shift this year as the interest in bitcoin gave rise to interest in other cryptocurrencies, with a cottage industry of new products and services emerging around them.

As people embraced bitcoin and ether, other cryptocurrencies began to attract investors, which eventually led capital into different and diverse projects. If you didn’t like certain attributes of bitcoin for whatever reason, other tokens and protocols were more readily available in 2017 than ever before, and this demand came sooner than was really expected.

There are thousands of cryptocurrencies that exist today for a wide array of utilities and use cases, and over the last year, we have seen an increase in demand for these cryptocurrencies. We believe that an overall interest in decentralized technologies, community investment and collaboration, and the dramatic increase in the market capitalization of the crypto ecosystem have all fueled this acceleration.

This year's action also gave rise to ICOs, an entirely new layer to the ecosystem. We've seen the number of ICO white papers increase dramatically over the last year as entrepreneurs look to fund a dizzying array of projects.

According to Icodata.io, the number of funds raised increase by over 6,000% and the number of deals issued increase by over 2,500% year-over-year.

Action to adoption

If 2017 was about education turning to action, 2018 is about action turning to adoption. 2018 could set the stage for white papers converting into production-grade products.

Right now, investors are still exploring what their strategy will ultimately be — despite the giant increase in demand this year, a lot of it was more dipping a toe in than making a big splash. Looking at the year ahead, we expect to see the institutional capital magnified, with cryptocurrencies more fully established as an asset class.

More crypto-funds popping up, more institutions making crypto a key part of their strategy, more jurisdictions providing regulatory clarity. And to be clear, many of the ideas and projects in the marketplace will fail, but may give rise to better developed ideas and projects down the line.

While it's still early days and no one knows with certainty how this will all play it, I expect it will be fascinating ride — and Cumberland is looking forward to being here at every step.