LONDON: If 2021 was the year that cryptos went mainstream, what next for digital assets?
There are as many predictions for the price of bitcoin and other major cryptocurrencies as there are days of the year, so we won’t even go there but, if previous years are anything to go by, expect more volatility.
Bitcoin more than doubled in price from January to early November, reaching a record $67,554, but has had a torrid time since and was trading on the last day of the year at $48,276, yet still 66 percent higher in 2021.
Crypto decoupling
A trend that has been predicted by numerous industry observers is crypto decoupling, i.e., the idea that not all coins will follow bitcoin up and down but will trade independently based on their own value.
“Different crypto sectors have different value drivers,” according to Messari’s Crypto Theses for 2022. “We’ve gone from ‘everything is a cryptocurrency’ to ‘actually, there’s currencies, fat protocols, DeFi apps, distributed computing platforms, NFTs, work-to-earn markets…’. Discerning investors increasingly look at the actual usage and underlying microeconomics of various networks and trade around their unique growth drivers.”
Bitcoin mining becomes more concentrated
Arcane Research has predicted more bitcoin mining bans in 2022, particularly from countries with weak grids or low energy production capacity, meaning more mining will be pushed to countries with robust grids and plentiful energy supply.
One of the upsides is that producing bitcoin will likely become less of an environmental drain as countries with cleaner grids take up the slack. Downsides could include a less well-distributed mining network.
Stablecoins face regulation
Regulatory attention on cryptos generally and stablecoins in particular has been ramping up in 2021 and 2022 is likely to be a year of action on that front.
Stablecoins, such as Tether and USD Coin, maintain a one-to-one value with fiat currencies, such as the dollar, and are backed by low-risk assets in those currencies. At least, that is what investors had assumed. In October, Tether agreed to pay a fine of $41 million to the Commodity Futures Trading Commission for falsely claiming its tokens were fully backed by US dollars.
Later that month, a major customer of Tether, Alex Mashinsky, told the Financial Times the company lends out new stablecoins in return for cryptocurrencies, further calling into question Tether’s founding promise that it uses only real dollars to issue its tokens.
In June, Eric Rosengren, the president of Federal Reserve Bank of Boston, named Tether as a possible challenge to financial stability. Earlier in 2021, the New York attorney-general, Letitia James, said Tether had lied in the past about its reserves and called its founder and his colleagues “unlicensed and unregulated individuals . . . dealing in the darkest corners of the financial system.”
More countries adopt cryptocurrencies
El Salvador became the first country in the world in 2021 to recognize bitcoin as legal tender. Already more El Salvadorians have bitcoin wallets than bank accounts, according to the country’s president, allowing them to send and receive remittances at lower costs.
While the International Monetary Fund and the World Bank have warned against such moves, citing a risk to financial stability, many other countries are said to be considering similar moves, particularly in South America, such as Panama and Paraguay. They might not adopt bitcoin specifically, but instead introduce a stablecoin or a central bank digital currency, known as a CBDC.
China to launch digital currency
China is planning to launch its CBDC, the e-CNY, in time for the Beijing Winter Olympics in February, and more than 140 million Chinese residents already have an e-CNY wallet, while $97 billion has been transacted in the digital currency through various pilot programs.
Major central banks around the world will be watching closely. While US Treasury Secretary Janet Yellen and the Federal Reserve have expressed no immediate need for a digital dollar, expect a sudden change of direction if the e-CNY seems to be giving China greater influence over global capital markets.