Cryptocurrencies emerged as a legitimate asset class in 2021, gaining acceptance amongst traditional investors and financial institutions globally. The increase in crypto prices was driven by a combination of increasing user adoption, loose monetary conditions, and crypto finding real use cases for the first time - with Decentralized Finance (DeFi), Non-Fungible Tokens (NFT’s) and Blockchain/crypto gaming, all gaining popularity.
The total number of crypto users is now estimated to have exceeded 300 million people globally, approximately the same amount of people that were using the internet in 1998. The growth of crypto users appears to be growing at the same rate of growth as early internet adoption grew.
Decentralized Finance (DeFi)
- Total value locked in Decentralized Finance Applications on Ethereum increased to US$100 billion by December 2021, up from US$25 billion in January 2021 (+300%).
Non-Fungible Tokens (NFT’s)
By December 2021, the total value of NFT’s on Ethereum increased to US$8.7 billion, up from US$56 million in January 2021 (+15,435%).
Crypto (play to earn) Gaming
- Crypto-based games grew exponentially in 2021. Crypto-based games allow users to generate income by completing missions, and collecting in-game NFT’s which they can then trade.
- Axie Infinity, the leading crypto game in 2021, attracted 8 million players in less than a year. Axie’s token is up 13,500% in the past year. Axie Infinity reached an all-time market cap high of $10b in November.
Key Crypto Industry Developments and Highlights of 2021:
January / February
- On the 8 February, Tesla announced a US$1.5 billion purchase of Bitcoin (BTC) and that it will commence accepting BTC as a payment in 2022. This led to a 50% increase in the BTC price ($59k up from $38k) in the 2 weeks following the announcement.
- Visa & MasterCard announce it will begin supporting cryptocurrencies.
- PayPal announces that U.S. customers can use crypto currency.
- Goldman Sachs launches a crypto trading desk for its private clients.
- On 12 May, Tesla announced it will stop accepting BTC payments due to concerns over the Bitcoin network’s excessive energy usage. The announcement led to a 48% correction in the price of BTC, which declined as low as US$30k in the following 2-week period. Tesla also stated that they will recommence accepting BTC as payment once the network derives greater than 50% of its energy from renewables.
June / July
- Citi and JP Morgan announce it will roll out crypto services to its high net-worth clients.
- El Salvador became the first nation to adopt BTC as legal tender and commenced purchasing BTC as a treasury reserve asset.
- On the 24 September China banned all crypto related activities including BTC mining, driving BTC mining operations into other jurisdictions, including into the U.S, Kazakhstan, Russia, and Canada.
- On the 10 November 2021, the total crypto market valuation hit an all-time high of US$3 trillion. BTC and Ethereum (ETH), hit all-time highs of US$69K (+137% from 1-Jan) and US$4.9K (+563% from 1-Jan) respectively.
Despite the recent correction in crypto prices, the following on-chain metrics suggest that the mid-term outlook for crypto appears stable to somewhat bullish:
- Long-term BTC and ETH holders appear not to be selling.
- BTC and ETH continue to leave exchanges at record levels, implying they are being put into long-term “cold storage”.
- BTC miners are not increasing their sales of surplus BTC, indicating their expectation that price increases will continue in 2022.
- The continued development in blockchain technology, NFTs, crypto gaming, and growing user adoption globally, supports an optimistic outlook for crypto as we enter 2022. However, the key risk for crypto in 2022 is a broader sell off in equity markets, and a rise in unfavorable government regulations in key jurisdictions, such as in the U.S. and EU. As we enter 2022, BTC has an almost 30% correlation to annual movements in the S&P 500. This may indicate BTC is taking on more mainstream asset class characteristics, as opposed to alternative asset class characteristics.
- Over calendar year 2021, ETH outperformed BTC by 3.2 times. Will 2022 deliver the same outcome?
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