2021 will be marked as the year that witnessed the most historic performances in cryptocurrency and Web 3.0. Not only have mainstream coins like Bitcoin and Ethereum become more and more popular in mainstream media, but blockchain technology has introduced us to many more concepts. However, many are currently under the impression that cryptocurrencies may be in some sort of a bubble, as a crash may be imminent. But is this actually the case given how strong the markets have performed in the last 12 years? Let’s take a look.
2021 For Digital Assets
In 2021, we’ve also witnessed the rise of Non-Fungible tokens (NFTs), which are unique and virtual assets that users can hold. Collins Dictionary has even chosen ‘NFT’ as the word of the year for 2021. Out of all the crazy meme coins and new altcoins that have soared in the market, Bitcoin remains the number 1 pick and the largest cryptocurrency in terms of market cap as well. Often referred to as digital gold, Bitcoin’s market cap exceeded more than $2 trillion for the first time when it hit an all-time high of $70,000 in November. There have been several occasions where Bitcoin faced major corrections, falling as low as $35,000 after the crypto crash in May; it has been consolidating at strong levels and has been churning out healthy returns all year long. With a price of just $29,000 on January 1, Bitcoin has grown by more than 70%, currently sitting just under $50,000. Bitcoin also made a massive stride in the financial world when El Salvador announced that it would accept the cryptocurrency as a legal tender. But, this year has been historic because the markets are slowly experiencing a shift in consumer demand. While Bitcoin remains the biggest digital asset, the altcoin market dominance is growing simultaneously. The below graph by Statista shows that altcoins have been growing faster than Bitcoin in the last few years. While Bitcoin owned 85% of the cryptocurrency market cap in 2017, the number had diminished to 38% as of December 2021. Bitcoin vs. Altcoins over the years, Source: Statista Currently, the biggest altcoin is Ethereum. The cryptocurrency token Ether has a market cap of half a trillion, making it the second-largest cryptocurrency globally. However, it has outperformed Bitcoin in 2021. While Bitcoin gave investors a 70% growth in the current financial year, Ethereum has grown from $730 on January 1, to $4000. That is a profit of more than 500%, making it one of the most valuable tokens to hold in the current market. Other popular tokens that have provided investors with healthy returns range from Layer 2 solutions like Solana and Matic to popular meme coins such as Shiba Inu and Dogecoin. Top 15 crypto tokens (2021 performance), Source: Financial Express But what are the factors that can boost a similar growth going into 2022?
Institutional Adoption of Crypto and Bitcoin
Institutional investors have been increasingly open to holding Bitcoin and significant cryptocurrencies in 2021. Bitcoin is growing at a rate of over 100% a year, and the big investors want a big chunk of the digital currency pie. Major investors like Morgan Stanley and Goldman Sachs have invested in Bitcoin, while the Tech company MicroStrategy is the largest corporate holder of Bitcoin, with a total holding of over 114,000 bitcoin. Morgan Stanley became the first big U.S bank to give its wealthy clients access to bitcoin funds, followed by global hedge funds like JPMorgan filing to gain crypto exposure this year too. Many financial institutions have already gained indirect exposure to the crypto space via ETF investments. The news of the BTC ETF fund in September triggered a massive bull run that lasted till November. Grayscale Bitcoin Trust (GBTC), the firm behind the launch of the BTC ETF in the United States, has gained broad institutional investment. According to Fidelity, 52% of financial institutions are already invested in cryptocurrencies, and the number is expected to increase to over 70% by 2026 as well. This trend shows that Bitcoin and the crypto markets will enjoy a boost in user adoption by some of the biggest investors from around the globe.
Cryptos Will Play A Role In Helping Private Banks
The idea of banks adopting cryptocurrencies was bizarre to think of just a few years ago. But going into 2022, it is a huge possibility. The reason for Bitcoin’s launch in 2008 was to give investors an alternative to banks in the first place. Due to banks and financial institutions centralizing currency and having complete control of how the world’s money was used, Bitcoin gave users another alternative. Currency is decentralized through cryptography, allowing users to have 100% control of their transactions. Another massive benefit of cryptocurrency is the speed of transactions while maintaining a standardized price. Banks charge hefty fees for international payments, taking anywhere from 5-10 working days to complete the transfer. Bitcoin, on the other hand, charges a 0.5% fee per transaction with a transfer speed of 10 minutes. What’s ironic is that Bitcoin is one of the slowest blockchains for transfers. New alternatives such as Cardano, XRP, Matic, and other chains provide transactions in seconds while lowering hefty gas fees and transaction prices. If banks were to adopt similar blockchain-based applications in their systems, the benefit would be mutual. In a huge step towards collaborating with cryptocurrency projects, US banking regulators will be clarifying the role traditional banks can play with cryptocurrencies in 2022. A joint statement from the Federal Reserve and the banking regulators stated that the goal is to outline how banks can engage with cryptocurrencies – everything from issuing particular stablecoins to facilitating crypto assets for consumers will be covered. While the Federal Reserve under Chairman Jerome Powell has tended to show their disapproval for adopting cryptocurrencies as legal tender, they also believe there is some benefit to gain from digital assets. However, the Federal Reserve has been rumoured to conduct many talks revolving around the possibility of creating a digital token for the US economy. Powell cited the benefits and improvements in payment technology, which has led the reserve to release a research testimony on the benefits of creating a centralized cryptocurrency. On the matter, Powell had the following to say. “The effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks, and other payment service providers that allow money to flow on a daily basis,” Powell said in a video message accompanying the announcement.” “Our focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation,” In 2022, we will see how cryptocurrency starts to be implemented through the financial system, which will crush any rumours of digital currencies being in a bubble.
NFT and DeFi Activity Will Increase
The biggest thing to come out of cryptocurrencies in 2021 is NFTs. The blockchain technology that exists mainly on the Ethereum network is the centre of the Web 3.0 revolution. As we witnessed social media applications and the Internet of Things rise in Web2.0, this new concept uses blockchain technology to build decentralized applications and protocols. Developers use these popular blockchains, allowing users and investors to use DeFi (decentralized finance) projects to better control their assets. But some of these assets like NFTs are growing in purpose. NFTs are more than a money-making opportunity – the value is increasing with real-life use cases thanks to the metaverse – which is hoping to use cryptocurrencies, NFTs, and other protocols to create virtual environments for users to experience. And with more money coming into cryptocurrencies through financial investors and banks, these spaces will keep growing and developing as we enter 2022. Risks But do not think this is a journey without roadblocks. As cryptocurrencies have become popular – they have also become a breeding ground for scams. So many projects like the Squid Token and other meme coins have caused millions to lose their portfolios. The market will eventually get saturated to a point where most of these tokens will slowly fade away. It is essential to focus on the projects that provide real-life use cases and have the potential to still be around decades later. So expect there to still be a lot of volatility as we enter 2022.