Crypto: The Year Ahead

If crypto’s wild ride in 2021 wasn’t enough, then 2022 looks likely to provide investors with just as much excitement as the crypto train picks up speed and seeks to avoid the rocks on the tracks.

For context, let’s briefly consider some of the highlights of 2021 (or lowlights, depending on your perspective):

1. El Salvador made Bitcoin legal tender.
2. China banned Bitcoin again causing most Chinese Bitcoin mining operations to cease operating or move operations elsewhere.
3. Elon Musk pumped Dogecoin (a so-called “meme” coin) to a high of $A0.94 on 7 May, only to watch it fall to around $A0.25 as of writing in late December 2021, while also putting $US1.5b in Bitcoin onto Tesla’s balance sheet.
4. Bitcoin started 2021 at $A40,000 per coin, rose to an all-time high of just under $A93,000 on 11 August, only to find itself at $A66,000 as of writing (still a 65 per cent return for the year), and briefly achieving a $US1 trillion market cap along the way.
5. Christie’s auction house sold a digital artwork as an NFT (non-fungible-token) for $A95 million. The artist Mike Winkelmann, aka “Beeple”, sold another artwork in November for $A40 million, proving he’s no one-hit-wonder.
6. So-called Ethereum killers made their move with the likes of Solana, Avalanche and Cardano entering the top-10 cryptos, while Ethereum retained its dApp (“digital app”) blockchain crown, for now at least.
7. DAOs (“Decentralised Autonomous Organisations”) emerged to allow like-minded communities to organise themselves via smart contracts.
8. The first Bitcoin ETF launched in the USA on the NYSE, albeit tracking Bitcoin futures contracts as opposed to Bitcoin spot prices.
9. Central banks around the world including the RBA announced or undertook CBDC (“central bank digital currency”) initiatives.
10. CBA announced a deal with Gemini to provide crypto exchange services in 2022 to its Australian customers.

Crypto market cap exceeded $A3 trillion during 2021, putting it near Microsoft’s market cap, with Bitcoin making up around 40 per cent of the total ($A1.2 trillion). Bitcoin dominance has been steadily falling as other blockchain and digital assets have emerged and grown, and this trend may continue as crypto use cases expand beyond Bitcoin’s store of value.

The total crypto market cap approached that of the value of gold as a financial asset (roughly $A3.5-4 trillion excluding gold as jewellery or for technological applications), with Bitcoin still around a third of gold on a like-for-like basis.

Looking ahead, 2022 is likely to see a continuation of many of the trends observed during 2021, albeit with some consolidation after the significant increase in market cap in 2021.

1. DeFI was one of the major trends in 2021 with total value locked rising from $US18 billion to around $US246 billion at year’s end, a multiple of just under 14 (according to https://defillama.com/). Regulation of DeFI including Anti-Money Laundering (AML) and Know-Your-Customer (KYC) protections is likely to become a more significant feature in 2022.
2. Stablecoins became a permanent feature of the crypto landscape, especially for their role as an alternative source of better yield compared to fiat. USDC started 2021 with a market cap of $US4 billion rising to $US42 billion by year’s end, and USDT went from $US20 billion to $US78 billion, leaving it in 4^th position of all crypto tokens by market cap. Their attractive yields compared to cash will likely see this trend continue, if not accelerate. Compound Finance is paying 3.13 per cent annual percentage yield (APY) on USDC as of writing.
3. Users sent more than $US26b in value to Ethereum-based smart contracts for NFTs during 2021 according to Chainalysis. Data from Opensea, the world’s largest marketplace, indicates that less than one-third of NFTs purchased during the minting stage are later sold for a profit, whereas NFTs traded on secondary markets delivered a profit over 65 per cent of the time. Risks remain for young players.
4. GameFI, combining the popularity of gaming with decentralised blockchain- based financial incentives, was one of the big emerging trends of 2021 and will continue to flourish in 2022. The ability to “play-to-earn” in-game rewards in the form of digital tokens that can be traded for other digital tokens or even fiat currency takes the concept of in-game rewards to a new level. Axie Infinity became the first gameFI project to achieve $US1 billion in token sales in 2021.
5. DAO’s may achieve a more definitive legal standing which would likely increase protection from liability for DAO participants. Even the Australian Government got in on the act, releasing its “Select Committee on Australia as a Technology and Financial Centre” paper late in 2021, referring to the current legal uncertainty as a handbrake on progress. The paper also discussed the potential for Australia to achieve a competitive advantage in this space.
6. Ethereum 2.0 will likely complete its transition in 2022 including the move from proof-of-work (PoW) to proof-of-stake (PoS) consensus mechanism. The hoped-for result will be faster transaction throughput and lower network costs, leading to increased usage by DeFI, NFT, GameFi and other dApps.
7. Corporate blockchain projects will continue to proliferate, such as Amazon’s Managed Blockchain service, or the catch-up being played by Visa and MasterCard.
8. Crypto public listings are predicted to grow in 2022 according to Blockchain data research firm Arcane Research including that of Circle Financial, the issuer of USDC in a SPAC merger estimated to be $US4.5 billion in market cap.
9. Bitcoin’s energy debate will continue. Incentives driving Bitcoin miners to source the lowest cost energy and initiatives such as the Crypto Climate Accord are helping to shape miner behaviour.
10. Crypto funds will continue to emerge and see increased funds flows from institutional,  professional and retail investors looking for exposure via professionally managed vehicles.

Despite the frenetic activity across the space, after significant price increases of many digital assets during 2021, considered asset selection and/or cautious market timing may prove to be the wisest approach to crypto markets during 2022. Investors nervous about investing directly now have various funds to choose from. Nevertheless, the sheer amount of activity and growing investor interest are likely to see the overall crypto market cap continue to grow throughout 2022.