There is no denying that the last few years have seen big strides made in the legalization of cannabis and the growth of a new industry. In 2020, legal cannabis broke new ground in many ways, for example with New Jersey, Montana, and South Dakota voting to legalize the recreational use of cannabis and other states, such as Arizona and Mississippi, legalizing it.

Several startups are receiving increased funding, such as Nabis, a software-enabled cannabis distributor that seeks to link farmers, manufacturers, brands, and vendors to improve the distribution process.

It seems as if the dynamic of the industry changes every day, with fast-paced mergers and acquisitions (M&A), new companies launching, and older outfits coming to prominence.

With the continuing improvement in laws around cannabis, the industry has nowhere to go but up. In fact, the U.S. cannabis industry alone is expected to reach $30 billion in market value annually by 2025.  But with any budding industry, there are always challenges to overcome.

Here are some of the challenges that the cannabis industry can expect to see in 2021.

Key Takeaways

  • The cannabis industry is growing rapidly, with annual market values expected to reach $30 billion by 2025.
  • Though the industry has seen significant improvement, particularly around legality laws, it will continue to face many challenges.
  • Legality and regulation will continue to be a shaping factor of the industry, as different countries, and states within the U.S. approach the use and sale of cannabis differently.
  • Banking will continue to be a challenge as cannabis companies within the U.S. cannot access traditional banking services and largely have to operate in cash.
  • As established "addiction" industries, such as alcohol and tobacco, further cement themselves in the cannabis industry, changes and volatility will continue.
  • Overcoming the stigma of a drug that had been illegal for so long will bring its own difficulties.

An Ever-Changing Landscape

As the cannabis industry is growing and evolving, it has to continuously adapt to an ever-changing landscape. Much of this landscape relates to the legality of the drug, as different states within the U.S., and different countries, all have different laws on the legality, use, distribution, and growth of cannabis.

Trying to start a cannabis-related business or to invest in cannabis-related businesses is a difficult task as one does not know what regulatory change in the future might help or hurt. It's almost like walking through a minefield.

As the legal cannabis industry continues to establish itself to greater degrees, other, more established companies outside of the industry are getting involved in more significant ways.

Some of the best cannabis-related businesses to invest in include Curaleaf Holdings (CURLF), Cresco Labs (CRLBF), and Green Thumb (GTBIF).

The "addiction" industries—alcohol, tobacco, and pharmaceuticals—have been heavily investing in the cannabis industry, acquiring many firms, with the intent of selling cannabis en masse as they do their other products.

We can expect to see a changing landscape as cannabis companies consolidate under these larger, well-established companies, and how that impacts marketing, legality, and use. Even brands such as Coca-Cola (KO) are looking for ways to enter the cannabis industry.

This next year is likely to bring significant changes as more tobacco, alcohol, and other companies look to claim a piece of the cannabis space. For investors, this likely means increased unpredictability and volatility. Combine that with the issues around legality, and the cannabis industry is a difficult one to navigate.

The U.S. Market

Some of the challenges facing the cannabis space in 2021 are likely to be continuations of prior issues and problems. One significant factor is the U.S. market. The U.S. remains a highly complicated space for cannabis companies and investors, in large part because, while cannabis remains illegal at the federal level, a growing number of states have allowed cannabis companies thanks to local legalization decisions.

For cannabis companies looking to expand into the U.S. market, it's not so easy as simply setting up shop in a state which has legalized cannabis. Companies are forced to deal with myriad legal and financial barriers, with many companies having to seek out capital from Canadian investors, as Canada has legalized cannabis and the industry is already finding a structure for itself with many companies operating.

Other outfits have to navigate the complicated world of importing and exporting products that remain federally illegal, as well as the issues surrounding operating across state lines when laws change dramatically around the country.

Investors might look to companies that have developed into large-scale operations in the Canadian market for a clue as to how these firms will break into the U.S. market in a similar way. As of yet, though, this has proven a significant challenge.

Investors should watch out for news about the SAFE Banking Act and the STATES Act, both of which could have a dramatic impact on the ability of U.S. cannabis companies to grow and thrive.

Another issue facing the U.S. market is banking. Congress has yet to lift banking restrictions on cannabis, meaning firms have little access to capital and have to rely on cash, which has limited the potential for expansion among U.S.-based cannabis firms.

New Products, New Challenges

In 2021, new products are likely to take the cannabis industry by storm. Innovative new hemp- and CBD-based products, vaping equipment, edibles, and more are all in various stages of development.

While some of these products will probably not have a significant impact on the cannabis industry overall, others may prove to be game-changers. The latter is particularly likely if cannabis-related products, such as CBD, are removed from Schedule I classification.

This status change would allow for rapid adoption across the U.S., potentially developing into a major segment of the cannabis market virtually overnight.

Stigma

Though cannabis is becoming more accepted in society, seen by the passing of legality laws and the growth in the industry, there are many stigmas that still come with the drug, as it has been an illegal substance for so long.

Overcoming this stigma, particularly when it comes to large-scale marketing strategies, employer drug tests, discussions with families, and so on, will continue to be a challenge as society slowly accepts the drug.

The Bottom Line

Though the cannabis industry is growing and the use of the drug is becoming more accepted in society, the industry will continue to face many challenges that will impede its growth and make it difficult for investors and businesses to operate successfully.

It is important for anyone involved in the cannabis industry to be on top of the constantly changing laws and put themselves in a position to easily adapt to them.