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Cryptocurrencies – Innovative disruptor? What’s the end-game?

Saxo Strategy Team

Summary:  The crypto space continues to get big exposure and over the last few years it has moved from being an obscure private almost religious cult to being adopted by hedge funds and institutional money. This is an attempt to break down the crypto space into what we see as the underlying components.

The crypto space is no longer dominated exclusively by technophiles and hard core crypto believers, but is a growing maturing business looking to establish a critical mass and a final end game, which most naturally will be on top of a blockchain breakthrough as the transactional “currency” in that space.

We are still open for the ultimate endgame, but as the space matures what we call the T.R.E. becomes more important: Taxation, Regulation and Environment. These three “letters” represent both the challenge but also the opportunity. The classic dilemma being that to become mainstream its needs to deal with the T.R.E. and create solutions, disruption and innovation competing with the same main-stream banking and technology space plus the incoming digital currencies launched by governments and central banks. We at Saxo Bank Group are firm believers in scale, productivity, innovation and entrepreneurship all of which this space appeal and addresses.

We see an investment in cryptos as:

  1. As a similarity to buying an option: it may be worth 0 or a manifold of the invested value.
  2. As exposure to technology against printing of money (inflation).

Additionally, the potential for effective cross-border payments and the non-financial applications of blockchain technology adds to the valuation of cryptos. Furthermore, the space will always be boosted by the community who fears that digitalization will hand too much power to private corporations and governments.

Below we zoom in on our focus points for the crypto space.

Speculators and leveraging

  • The number of active crypto trading addresses have increased significantly over 2020 and 2021, and a lot of “new” traders are in the game. They trade based on opinions in internet fora (like with the GameStop and AMC rallies), and the many of these faced hefty losses due to their overleveraged positions during the crypto crash in May. These kind of traders will be more likely to panic and may act as catalysts during major drawdown events.
  • According to a recent survey by FCA on cryptocurrencies in UK, the estimates show an increase in the number of crypto owners and in the awareness around cryptos. But the level of understanding is declining, “… suggesting that some crypto users may not fully understand what they are buying”.

“Green” cryptos - mining

  • Many of the oldest cryptocurrencies such as Bitcoin and Ethereum are currently using a proof-of-work algorithm (explanation in appendix) for running their blockchain, and it is currently facing a global pushback due to its massive energy consumptions. The opposition sets the stage for other cryptocurrencies which are using proof-of-stake (see below) for verification of transactions, as they do not require an extensive power supply. We see the evolution of the global green agenda is crucial for determining which cryptocurrencies will take the lead over the coming years.
  • When fully rolled out, the ongoing Ethereum 2.0 upgrade will move Ethereum fully away from proof-of-work to proof-of-stake, and the upgrade is expected to be completed in end-2021 or 2022.
  • The global green agenda has caused countries such as Iran and China to introduce partial bans of mining operations, and more will likely follow.

Institutional adoption

  • Major financial institutions have over the past year introduced crypto services to clients, and larger companies have added crypto has cryptos on their balance sheet. Additionally, a significant driver for the crypto rally has been the increasing institutional interest and the growing enthusiasm about DeFi (‘decentralised finance’), by which entrepreneurs in the crypto industry can re-create standard financial instruments outside the control of companies or governments. Furthermore, the blockchain technology enables ICOs, initial coin offerings, which is a fundraising method popular to startups. ICOs are facilitated through issuance of new crypto tokens, and backers of ICOs are motivated by an eventual return on their investment.  ICOs are usually done through payments in some of the major cryptocurrencies, in return for the new tokens, and thus the popularity around ICOs boosts the crypto space sentiment.
  • The European Investment Bank (EIB) used Ethereum technology in bond offering in collaboration with Goldman Sachs, Santander and Société General on the issuance. JPMorgan Chase & Co. is preparing to offer an actively managed bitcoin fund to certain clients.
  • The Basel Committee proposed in mid-June much-needed rules around banks regarding holding cryptocurrencies, which by the markets initially saw as a positive sign of adoption.


  • The major cryptocurrencies, Bitcoin and Ethereum, are facing major bandwidth issues, with possibility to process 7 and 10-15 transactions per second, respectively. The increased popularity for crypto trading over the past year has caused record-high transaction fees, as traders are competing for getting their transactions through.
  • Many crypto currencies of newer generations are created without these transaction limitations. But the catch is that more transaction per second means fewer miners to verify each transaction, so they need proper security protocols. And with many transactions, all information cannot be distributed and processed on a single blockchain due to memory constraints. New cryptocurrencies experiment with breaking the big blockchain into shards, which each process less information, but they needs an extra layer to connect the shards, putting larger requirements on the technological solutions.
  • The question on scalability is whether the first-mover advantage of Bitcoin and Ethereum, combined with the ongoing Ethereum upgrade which is to fix the transaction bottleneck, is enough to trump the third-generation cryptocurrencies which intrinsically already support this. (Keep in mind that upgrades to an existing network may be complex to roll out and needs acceptance from the existing community. And some may be negatively affected by the upgrades, e.g. miners if the fee for them is lowered, which can slow the process).
  • The consensus around Bitcoin’s first upgrade in four years, Taproot, was reached in June 2021, with expected implementation in November 2021. The upgrade intends to provide improved privacy, scalability and security to the Bitcoin network.


  • Governments are still trying to establish a standpoint regarding cryptos. Some take drastic measures towards cryptos, while other see cryptos usage to be too wide in order to avoid and thus seek ways to include and regulate cryptos. Additionally, the anonymity around crypto trading is weakened as major crypto exchanges are forced to disclose info about (larger) transactions and to introduce KYC (know-your-customer) check for clients. This is directly opposite to the originals reasons for introducing crypto currencies. As stated by the founder of Ethereum, Vitalik Buterin, governments "… do have a lot of power to make it more painful to participate in the crypto sector" and that relationships between regulators and crypto players risked becoming "more confrontational than it needs to be."
  • Full/partial bans on trading/storing cryptocurrencies and using them for payments are considered/have been issues several countries such as China and Turkey. Other governments are increasing the regulation and put reporting requirements on crypto exchanges, such as Argentina.
  • The European Commission announced with the launch of their Digital Finance Package in September 2020 that “the future of finance is digital”, and that “we should embrace the digital transformation proactively, while mitigating any potential risks”. It includes the Regulation on Markets in Crypto Assets (MiCA), which seeks to “provide legal clarity and certainty for crypto-asset issuers and providers”.

Central bank digital currency (CBDC)

  • Multiple countries have pilot projects and CBDCs have been launched for public used in both Bahamas and Cambodia, whereas China is one of the major countries running pilot projects.
  • A clear message was sent by the European Central Bank in the beginning of June 2021, identifying a significant stability risk if a central bank choose not to offer a digital currency. According to their report, issuing Central Bank Digital Currency (CBDC) “…would help to maintain the autonomy of domestic payment systems and the international use of a currency in a digital world”, as well as boosting cross-border transactions at lower costs.
  • El Salvador recently took another approach than a CBDC in order to adopt to digital assets. They became the first country in the world to adopt bitcoin as legal tender, thereby requiring firms to accept payments in Bitcoin, as well as allowing taxed to be paid in Bitcoin.


  • The opinions whether cryptos and specifically Bitcoin can act as a store-of-value are widely spread. Some refers to it as the “millennial gold”, as the increased use and adoption of cryptos in 2021 convinced them that cryptos have reached a critical mass of credible investors. However, a lower price volatility and demonstrated real world use cases seem to be necessary for a cryptos to persist and act as a store of value, and we do not seem to be at that point yet.
  • Bitcoin has finite supply and initially seems like at better candidate for store-of-value, in similarity with the scarce supply of gold. Ethereum does not have a finite supply, and new ETH is issued on a daily basis whenever transactions are processed, making Ethereum inflationary by nature. However, the Ethereum 2.0 upgrade contains proposals for limiting the inflation through burning ETH whenever transactions are carried out, seeking to keep the total ETH supply constrained.
  • Cryptos has been popular in countries with large inflation such as Turkey and Venezuela.

Security breaches / bugs / fraud

  • Due to the digital nature of cryptocurrencies, IT security risks always pose a threat, and many blockchain technologies are still experimental and maturing. Security loopholes exist both in the cryptocurrency technology, digital wallets, etc., and despite thorough testing of the security measures, black-swan technological events still pose a threat. If a major security breach occurs in the crypto space, a drastic fall in the sentiment around cryptos is expected.

  • In 2019, a severe bug was found for Ethereum, which posed a “severe threat against the Ethereum platform”. Numerous cybersecurity attacks was reported by exchanges and wallet providers in 2020, as well as fraudulent ICOs.

NFT – Non-fungible tokens

  • NFTs are digital objects which are unique, like a one-of-a-kind trading card. They are currently mostly being hyped as digital art, but in principle they can be anything digital, such as video clips, drawings, music etc. They are stored on a blockchain which ensures the uniqueness, and most NFTs are a part of the Ethereum blockchain, but NFTs may as well be implemented on other blockchains.
  • The most expensive NFT until now, “The first 5000 days” was sold in March 2021 for USD 69 mn.


Appendix - Dictionary:

Proof-of-work: A decentralised consensus mechanisms used widely for cryptocurrency mining for validating transactions and tokens in a secure manner without need of a third-party. Members of the network spend computational power to solve an arbitrary mathematical puzzle to prevent anybody from introducing fraud in the system. Proof-of-work requires significant amount of energy, which only increases when more miners join the network.

Proof-of-stake: Transactions are verified by so-called validators, who each has staked an amount of the given cryptocurrency. In contrast to proof-of-work, where the ones with the largest computational power has the largest influence, proof-of-stake is based on the amount of coins a validator has staked. The validators earn rewards by successful validations, but lose their stakes if any fraud is detected or if they in any other way fail to verify. Compared to proof-of-work, proof-of-stake has a better energy efficiency and lowers barriers to entry, as no advanced, power-intensive mining equipment is needed. 


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