In part one of a three-part series, we take a look at the biggest trends and market drivers that will shape the cryptocurrency and blockchain space in 2022 and beyond.
The continued growth of the digital assets space over 2021 has left little doubt that the overall trend towards greater adoption of cryptocurrencies and decentralised systems is very much intact in spite of the growing pains. Indeed, there is plenty of evidence to suggest that the rate of adoption of blockchain technology is progressing in a similar fashion to the early days of the internet, with early delivery and progress hampered by many of the same growing pains, such as a lack of talent, poor communications, flawed application design, and a low appetite for risk.
While the quadrupling of the total cryptocurrency market cap (which briefly touched $3 trillion in November 2021) was to an extent fuelled by the continued warming of institutional investors both towards bitcoin and altcoins, the broader increases in adoption have continued to be fuelled by other major drivers. In particular, the growth of NFT use cases and the rise of the metaverse became headline trends, both of which have proven a natural fit for blockchain technology and have accelerated crypto adoption in the process.
Figure 1: Comparative adoption rates of cryptocurrencies and the Internet
TREND #1: Macro decoupling
The bitcoin network first introduced blockchain technology to the world in 2009 and has to a large degree remained the dominant influence over crypto market price action ever since. However, 2021 saw the noticeable acceleration of the counter-cyclic movement already observed in 2020, where bitcoin dominance (the totality of crypto market cap owned by bitcoin relative to altcoins) continued to decline throughout the year.
Figure 2: Bitcoin market cap dominance in 2021
This reflects the declining influence on the broader cryptocurrency market of the macro inputs (e.g. FED policy, inflation, stock market performance) that typically impact the price of bitcoin due to its falling proportion of the total market. Secondly, it suggests that more participants are understanding the functional difference between Proof of Stake (PoS) and proof of work (PoW) protocols, as evidenced by the price action of layer one blockchains such as Ethereum, Solana, and Avalanche whose value is largely determined by the network effect derived from the number of transactions taking place within ecosystems.
At the same time, this decoupling has also been manifest between different markets, with bitcoin exhibiting significant tendencies to decouple from stock market movements in what has become an increasingly uncertain macro environment. For example, while the S&P500, gold, and other markets all trended negative over September and October due to fears over a possible EverGrande collapse and the earlier-than-expected announcement from the FED to put the brakes on asset purchases, bitcoin was still able to rally over 50%.
As bitcoin's market cap grows and its volatility stabilises over the long term, investors will increasingly seek out investment returns in the altcoin market, making a return to the days of 70%+ bitcoin dominance highly unlikely, particularly as overall adoption of production-grade decentralised systems gathers pace.
TREND #2: Institutional investment
While some argue that the original intent of blockchain-based cryptocurrencies is diametrically opposed to stocks, bonds, and other financial assets under the centralised control of governments and financial intermediaries, others opine that participatory vehicles for institutional investors are essential for the long-term stability and viability of the market is.
Regardless of one's point of view, there is no denying that institutional interest has been building for some time, and is widely considered to be a net positive for the overall health of the market. As such, the institutional drive to bring about the facilitation of greater market participation via pensions and investments meant that the need for regulatory clarity hit the top of the agenda in 2021.
The approval of the first bitcoin ETF on October 19 was perhaps the most emblematic development of this increased appetite for institutional participation in the crypto markets. Even though its launch proved controversial – the version of the ETF launched is futures-based and the not spot- based product so many market participants had hoped for – there is no question that it reflects the consensus view that regulated products will be a net positive for the overall health of the market through the institutional and professional investment participation.
For example, in a survey conducted by Bitwise/ETF Trends of nearly 1,000 financial advisers, though only 9.4% said that they allocate to cryptocurrency in client accounts, 47% said the launch of a Bitcoin ETF would make them more comfortable with cryptocurrency exposure, up from 37% the previous year. Furthermore, institutional investors and family offices are increasingly securing digital asset exposure not only to benefit from the sectoral out-performance but also in order to position clients for the current economic realities of persistently low-interest rates and high inflation.
Figure 3: More family offices are turning to digital assets as a hedge against currency debasement
This is highlighted in the global family office survey conducted by Goldman Sachs, in which 40% of family offices globally indicated that they are thinking about currency debasement, with 42% investing in digital assets as a core part of their strategy to position themselves for these macro realities vs. only 37% in precious metals. (Figure 3). Another indicator of this “institutionalisation” of the crypto market FTSE Russell announcing in December that 43 assets had been vetted to be added to the FTSE Digital Assets (DA) index in 2022, pointing to the need for accurate pricing data as more institutional players enter the market.
TREND #3: Expansion of NFTs
The rapid pace of NFT adoption by artists, celebrities, professional athletes and clubs, musicians and organisations, was one of the defining trends of 2021 and is currently playing a pivotal role in cryptocurrency adoption. Unlike the like-for-like interchangeability – or fungability – of bitcoin and other crypto assets, NFTs which are unique digital tokens that can be used to verify authenticity and represent digital ownership of virtually any work of art, document, or object (for more see NFTs: The Pros, Cons, and Where They Fit With The Big Trends)
NFTs have mostly taken the form of digital art hitherto, with the most notable sale coming in March after the auctioning of the artist Beeple's 'First 5000 days' digital image for $69 million. Very soon, NFTs were being generated by artists, performers, celebrities – from Martha Stewart to Snoop Dog – as well as corporations like PepsiCo Inc. This development is reflected in the explosive trading volume growth witnessed on OpenSEA, one of the largest NFT platforms, which rose 646 fold from a trading volume of $21.7 million in 2020 to finishing 2021 with a volume of $14 billion.
Figure 4: Cumulative transaction volume on OpenSea, 2021
Beyond the art world, sports memorabilia, ticketing, medicine, and even music have all provided additional scope for NFT expansion. However, it is the gaming industry that has the largest potential – particularly with the rapid rise of the metaverse and play-to-earn gaming (which will be covered in part two of our trends overview). Here, NFTs can take on a wide array of different functionalities including rewards to gamers, special in-game characters and skins, as well as digital proof of ownership for land, property, and other in-game objects or elements. This utility of NFTs to streamline the valuation and monetisation of different kinds of property – including intellectual property such as patents – through the blockchain-based utility of self-executing contracts will undoubtedly have a large future impact on the legal industry.
Disclaimer: The information contained within is for educational and informational purposes ONLY. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.