Silicon Valley and Wall Street showed in the last quarter of the year where the crypto economy will head in 2021. In addition to new groups of investors, it is also about new rules of the game. Why private keys are being forgotten and why a diversified storage strategy also makes sense for digital assets.
As we have already reported in detail , the current momentum in the crypto market is mainly coming from institutional investors. This means that large investors such as hedge funds, financial service providers and companies in particular are responsible for the rising prices of Bitcoin and Co. However, this new form of establishing and institutionalizing the crypto-economy also brings about changed rules of the game. What became visible in the last quarter of 2020 will accelerate further in 2021: the move away from self-custody from the investor’s point of view.
New whales and re-centralization of Bitcoin
With the emergence of these new major Bitcoin investors, there is a further centralization of Bitcoin, at least from a custodial perspective. So far, even the largest Bitcoin assets have been distributed relatively unevenly across a few wallet addresses, but these have often been privately owned. Should mean that a single Bitcoin investor has his private keys.
This is changing significantly with hedge funds like Guggenheim Macro Opportunity Fund or PayPal’s crypto service . It is true that through PayPal a further distribution of Bitcoin also takes place on the small investor side, and accordingly also a decentralization, but not from the point of view of „physical custody“.
It doesn’t matter whether you buy shares in a documented Bitcoin ETC from HANetf / ETC Group (ISIN: DE000A27Z304) or VanEck Vectors Bitcoin ETN (ISIN: DE000A28M8D0) or whether you load cryptocurrencies into your account via PayPal, you hand over access and control of your Bitcoin to a financial intermediary. Few players manage ever larger amounts of crypto currencies.
Who needs private keys?
While many institutional investors have no other choice but to accept the safekeeping offers, as they are not allowed to keep the private keys themselves, there is also a tendency that even small investors of the recent hour come less and less into contact with the option of self-safekeeping. The most user-friendly offers, regardless of whether PayPal, Revolut or the Bison crypto app from the Stuttgart Stock Exchange, only offer a custodial wallet in which the private keys are with the respective custodian.
Not only does the supply exert an influence on the demand, but it also shows, conversely, that a new, less idealistic, less state-critical or politically libertarian crypto-investor body is establishing itself. The mantra “Not your keys, not your coins” looks antiquated to them with a view to the year 2021 and its new offers.
In practice, decentralization and personal responsibility take a back seat. The motto is clear: You want to participate in the growth in value of digital assets as easily and conveniently as possible. However, self-custody does not belong to this rather pragmatic understanding of crypto.
The fruits of crypto corporate lobbying
The big players in particular are reinforcing this tendency because they don’t want to mess with politics and the regulatory authorities. The state has no interest in Bitcoin investors holding their own private keys. After all, the state doesn’t want you to keep your cash under your mattress or bury your gold in the garden. Accordingly, it can be assumed that the highly regulated and thus also centralized offers will be given the green light by politicians.
Basically, politicians can be grateful for any Facebook Libra or PayPal – even if they wouldn’t admit it – that guides new investors into a centralized, very controllable ecosystem. Really decentralized alternative offers through decentralized financial applications (DeFi), which work via a non-custodial wallet, have to be contained from the perspective of politics at all costs.
That now politicians like Olaf Scholz critical of Facebook’s Libra express , gives little sense in this context. If not long ago, the lobbyists from Facebook or PayPal in Brussels, Berlin or Washington will articulate the options clearly. To put it simply: either the politicians allow corporations with crypto ambitions and thus retain access to the transactions and users, or they prevent group crypto services and thus open the door to decentralized offers that are difficult to control.
The mere report that Facebook’s Libra would like to start with the first stable coins as early as January 2021 indicates that such an agreement has already been found.