The price of Bitcoin has had another astonishing year, rising almost 70% in 2021 and outpacing equity markets. With each lurch higher, it piques the curiosity of another wave of investors and this year, the institutional market started to dip its toe. More crypto-based products have been launched, and the asset class appears to be throwing off its Wild West reputation. Will this trend continue in 2022?
Blockchain data platform Chainalysis has devised a Global Crypto Adoption Index, which shows the vast growth in cryptocurrency adoption over the year with a scoring system.
A note on acceptance versus adoption. Acceptance denotes companies or organisations that accept payment in cryptocurrency. Adoption denotes the trading of crypto assets.
Its most recent report says: “At the end of Q2 2020, following a period of little growth, total global adoption stood at 2.5...At the end of Q2 2021, that total score stands at 24, suggesting that global adoption has grown by over 2,300% since Q3 2019 and over 881% in the last year.
The reasons for this increased adoption differ around the world, the report says:
“In emerging markets, many turn to cryptocurrency to preserve their savings in the face of currency devaluation, send and receive remittances, and carry out business transactions, while adoption in North America, Western Europe, and Eastern Asia over the last year has been powered largely by institutional investment.”
Rahul Bhushan, co-founder of Rize ETF, says:
“It’s a new and dynamic space and we certainly seem to be heading to a world where crypto is an accepted part of the financial ecosystem. The huge and rapid increase in price has created a perpetual FOMO (fear of missing out) and a desire to participate in the growth of cryptos.” He points out that crypto adoption is growing faster than internet adoption in the late 1990s.
Risk-On
This popularity has prompted a raft of new launches. Perhaps most notable was the launch of the first Bitcoin futures ETF in the US from ProShares in October 2021. Two others followed from Valkyrie and VanEck. The ProShares offering proved wildly popular, raising $570 million of assets in its first day, one of the most successful ETF launches ever.
There were also plenty of launches linked to cryptocurrencies, the only option in countries where there are still regulatory hurdles to investing in this part of the market.
Rise ETF, for example, has a Digital Payments ETF, with exposure to the cryptocurrency ecosystem. This includes companies such as Coinbase (COIN), the world’s largest crypto exchange (and a high-profile float of 2021). The other route many investors have taken is to invest via the chip companies--Nvidia (NVDA) and Advanced Micro Devices (AMD), for example, which have benefited from wider adoption of cryptos because their high performance graphics help with crypto ‘mining’.
Looking ahead to 2022, there are a number of dynamics at work influencing cryptocurrency markets. The first is regulation. Governments across the world have started to become increasingly nervous about having a widely used currency that is out of their control. Cryptocurrencies continue to be associated with criminal activity.
Chinese regulators banned all virtual currency trading and speculation in 2021. India also clamped down during the year, with Prime Minister Narendra Modi saying he wanted to ensure crypto didn’t end up in the wrong hands “which can spoil our youth”.
Cryptocurrencies continue to be unregulated in the UK--the FCA has said it “considers these products to be ill-suited for retail consumers due to the harm they pose.” This means crypto ETFs remain unavailable to UK investors.
Rize’s Bhushan believes that, like the internet, rules and regulations will start to emerge: “This should help validate cryptocurrencies as an asset class.” Eventually, there will be so many participants that regulators won’t be able to ignore crypto influence.
Another consideration is the extent to which cryptocurrencies will come to be seen as offering better protection against inflation than traditional options such as gold.
It is also important to watch the overlap with traditional financial markets, where there has previously been only light correlation with them. However, there are signs that institutional interest in cryptos is prompting greater correlation with conventional equity and bond markets.
For example, in early December, crypto markets tumbled after a volatile week on Wall Street. It seems they may be becoming part of a more general “risk-on” trade. If this correlation increases, crypto assets may lose a key part of their appeal.
Watch This Space
There is likely to be more product innovation. Could 2022 be the year that a provider comes to market with a physically-backed bitcoin ETF? Much will depend on whether demand for cryptos can broaden out from the original pioneers, and what influence that will have on the price.
Maryna Chernenko, managing director of UFG Capital, sees the crypto ecosystem growing on all fronts:
“It is only a matter of time before a global crypto index is floated. With the emergence of this index, other unique products including ETF, futures, and options are also billed to emerge through the index".
Cryptocurrencies still face real hurdles on their path to acceptance. They remain volatile, which is a real problem for any currency, but it is clear that their ecosystem is growing. Whatever happens in 2022, it won’t be boring.
