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BITCOIN at the Tipping Point BITCOIN At the Tipping Point Citi GPS: Global Perspectives & Solutions March 2021 Data provided by Citi is one of the world’s largest financial institutions, operating in all major established and emerging markets. Across these world markets, our employees conduct an ongoing multi-disciplinary conversation – accessing information, analyzing data, developing insights, and formulating advice. As our premier thought leadership product, Citi GPS is designed to help our readers navigate the global economy’s most demanding challenges and to anticipate future themes and trends in a fast-changing and interconnected world. Citi GPS accesses the best elements of our global conversation and harvests the thought leadership of a wide range of senior professionals across our firm. This is not a research report and does not constitute advice on investments or a solicitations to buy or sell any financial instruments. For more information on Citi GPS, please visit our website at www.citi.com/citigps. Citi GPS: Global Perspectives & Solutions March 2021 Sandy Kaul Richard Webley Global Head of Citi Business Advisory Head of Citi Global Data Insights Services +1-212-723-4576 | [email protected] +1-212-723-5118 | [email protected] Jonathan Klein Shobhit Maini Associate, Citi Business Advisory Services Markets & Securities Services Transformation +1-212-723-2622 | [email protected] +44-20-7508-7470 | [email protected] Omid Malekan Ioana Niculcea Blockchain Innovation Expert FinTech & Emerging Technology Lead, Citi Ventures Citi Business Advisory Services Adjunct Professor, Columbia Business School +1-212-723-5075 | [email protected] [email protected] March 2021 Citi GPS: Global Perspectives & Solutions 3 BITCOIN At the Tipping Point Kathleen Boyle, CFA The first Citi GPS venture into digital currency was back in 2014 when we featured it Managing Editor, Citi GPS in an article in our second Disruptive Innovations report. Although we discussed Bitcoin, we did so with the caveat that it was a branded digital currency and a freely available generic Bitcoin technology but there was the potential that a non-Bitcoin alternative digital currency would one day supplant it. In May 2014, when we published the report, Bitcoin was just five years old with a market value around $6.2 billion. We wrote that Bitcoin was familiar and welcome to younger generations and although older investors may have heard the word, they were generally less familiar with it and more skeptical. We recognized there was very little Bitcoin activity among institutional investors in organized financial markets as it was considered 'far too risky and volatile'. In the end, we still assessed Bitcoin as a 'wannabe asset' and a 'wannabe means of transaction' and lamented that although you could have a lot of Bitcoin, but there wasn't much to do with it. Another thing we've learned while writing Citi GPS reports on disruptive innovations is the time it takes a new product to become widely used by global customers has decreased dramatically. According to Visual Capitalist, it took the telephone 50 years to reach 50 million customers, 22 years for television, seven years for the Internet and just 19 days for Pokémon Go. So it's not a surprise the uptake of Bitcoin in the past almost 7 years has been nothing but extraordinary. Not only has Bitcoin increased in usage and value (hitting $1 trillion in market capitalization in February 2021), but it has created a whole ecosystem around it — including crypto exchanges, crypto banks, and new offerings into savings, lending, and borrowing. In the report that follows, the authors note the biggest change with Bitcoin is the shift from it being primarily a retail-focused endeavor to something that looks attractive for institutional investors. In a search for yield and alternative assets, investors are drawn to Bitcoin's inflation hedging properties and it is recognized as a source of 'digital gold' due to its finite supply. Specific enhancements to exchanges, trading, data, and custody services are increasing and being revamped to accommodate the requirements of institutional investors. Bitcoin is also evolving as the 'North Star' in the digital asset space and is a compass for the evolution of a broader ecosystem of crypto commerce. New innovations, including the announcement of fiat-backed stablecoins, used within public and private networks, may build pressure for central banks to consider their own digital currency options. Where could Bitcoin be in another seven or so years? The report notes the advantage of Bitcoin in global payments, including its decentralized design, lack of foreign exchange exposure, fast (and potentially cheaper) money movements, secure payment channels, and traceability. These attributes combined with Bitcoin's global reach and neutrality could spur it to become the currency of choice for international trade. There are a host of risks and obstacles that stand in the way of Bitcoin progress. But weighing these potential hurdles against the opportunities leads to the conclusion that Bitcoin is at a tipping point and we could be at the start of massive transformation of cryptocurrency into the mainstream. © 2021 Citigroup OR IMPLOSION? SPECULATIVE increasingly interested increasingly are institutions but retail, primarily is Bitcoin of Ownership the growing commerce ecosystem around cryptocurrencies. business case around Bitcoin, its expanding utilization, and potential. As it has matured, attention has shifted the to technology and social value proposition plus its financial Bitcoin initially interest drew from owners for its underlying LEVELS OF GROWING ADOPTION SHOWING BITCOIN MAINSTREAM ACCEPTANCE © 2021 Citigroup $20 billion per day billion $20 10% of volumes in early 2020 in the U.S. accepting Bitcoin OTC tradingBitcoin OTC s LatAm 8% Source: Hacker Noon Hacker Source: ma Bitcoin Retail u p ll-medium Source: HSB 82% to 30% in 36 2 020 NA % b Business and Institutional Client Institutional and Business usiness 70% 20% MENA 5% twice the volumes 2017-2018 of the firstthree weeks of 2021, 75% Crypto exchange volumes in volumes in South Africa and $536 million. +55% 30% Bitcoin monthly trading trading monthly Bitcoin Nigeria in August 2020 $500 billion Europe 7% Source: Coindesk Source: Source: Blandin et al 2020 Source: Reuters 63% 16% 9% APAC Unkown 75% has increased steadily increased has The number blockchain of addresses holding 1,000+ Bitcoins now being heldyears for five or longer The holding period for Bitcoin has increased, with 10% Bitcoin of 2020 and January 2021. October between 250% over by surged activity, institutional Open interest in CMEs Bitcoin futures, abenchmark for include: Bitcoin in activity institutional increased of Indications once. at bonds all government traditional diversifier, and a haven notsafe currently offered by that Bitcoin could represent an inflation hedge, a portfolio view investor institutional the fostered increasingly has The intersection low of yields and inflationaryexpectations ACCELERATES BITCOIN IN INTEREST INSTITUTIONAL Addresses Percent Bitcoin of Supply Held Over Time 1 40 60 50 30 1 2 20 2 10 ,5 0 , , , 1+ Years 000 000 500 500 % % % % % % % 00 0 12/09 12/09 06/10 06/10 12/10 12/10 06/11 2+ Years 06/11 12/11 12/11 06/12 06/12 12/12 12/12 06/13 06/13 12/13 12/13 3+ Years 06/14 06/14 12/14 12/14 06/15 06/15 12/15 12/15 06/16 06/16 12/16 4+ Years 12/16 06/17 06/17 12/17 12/17 Source: Coin Metrics Source: Coin Metrics 06/18 06/18 12/18 12/18 06/19 5+ Years 06/19 12/19 12/19 06/20 06/20 12/20 12/20 MAPPING THE FUTURE FOR BITCOIN Perceptions about what makes Bitcoin important continue to evolve and create new opportunities while increasing its perception towards becoming mainstream. A focus on global reach and neutrality could see Bitcoin become an international trade currency. This would take advantage of Bitcoin’s decentralized and borderless design, its lack of foreign exchange exposure, its speed and cost advantage in moving money, the security of its payments, and its traceability. Focus on Focus on Censorship Focus on Focus on Globality/ Technology Resistance/Store of Value Scarcity Value Exchange Networks Mainstream Global Trade Currency Facilitator? Digital Gold Perception “North Star” of Blockchain Eco-System New Type of Payment Part of Dynamic On-Chain System/Blockchain Commerce Marketplace Innovative Time OBSTACLES REMAIN The entrance of institutional investors has sparked confidence in cryptocurrency but there are still persistent issues that could limit widespread adoption. For institutional investors, these include concerns over capital efficiency, insurance and custody, security, and ESG considerations from Bitcoin mining. Security issues with cryptocurrency do occur, but when compared to traditional payments, it performs better. Illicit Activity Total Illicit Value Source: Chainalysis and U.S. Federal Reserve $25 3.0% 10011010010 10101000101 2.5% $20 01100111001 00100011101 01011101100 10001101101 1100100100 01101110000 2.0% 0.34% 2.13% 10011010010 $15 10101000101 01100111001 As a % of total cryptocurrency As a % of total cryptocurrency 00100011101 01011101100 1.5% 10001101101 transfer value (2020) transfer value (2019) 1100100100 01101110000 $10 10011010010 10011010010 10101000101 10101000101 01100111001 01100111001 01100111001 1.0% 00100011101 00100011101 00100011101 01011101100 01011101100 01011101100 10001101101 10001101101 10001101101 1100100100 1100100100 1100100100 1100100100 $5 01101110000 01101110000 01101110000 01101110000
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