The year 2021 was marked by several major breakthroughs in the cryptocurrency space.
For example, new crypto applications such as non-fungible tokens (NFTs) are gaining momentum, with sales of these digital assets setting new records at major auction houses. Second, Bitcoin has made strides toward mainstream acceptance with major websites such as Expedia and Microsoft accepting the currency as a medium of exchange. Third, in September, El Salvador became the first country in the world to accept Bitcoin as legal tender.
There are many examples of how the cryptocurrency market has expanded just in the past year. With this increased activity, what awaits us in 2022 for cryptocurrencies?
We believe there are three main areas in which cryptocurrencies will gain momentum in the coming year: greater acceptance of bitcoin as a payment method, increased regulatory scrutiny and increased NFT activity.
Understanding what motivates individuals to adopt bitcoin has been a challenge for researchers. A recent study suggests that five main factors contribute to the likelihood of someone using bitcoin:
- Trust the system
- word of mouth online
- The quality of the web platforms available for transactions
- Perceived investment risk
- Predictions about Bitcoin’s performance
Other studies have added more nuances to this argument by considering gender, age, and educational level as equally important factors.
Conditions in the crypto space have made it increasingly likely that Bitcoin will become mainstream in the near future.
First, there is a growing activity in online communities like Twitter and Reddit, where even crypto beginners can exchange information with seasoned investors for word of mouth advice on price predictions and trading strategies.
Secondly, there has been an explosion of new cryptocurrency exchanges – or trading platforms where one can exchange fiat currencies for cryptocurrency – and significant investments in the technological infrastructure of existing exchanges. These infrastructure investments expanded access to the cryptocurrency markets and also sparked interest from institutional investors.
Institutional Engagement, Regulatory Audit
The past year has seen institutional players such as the European Investment Bank (EIB) – the lending arm of the European Union – take a stand on cryptocurrencies.
In April, the European Investment Bank issued a 100 million euro digital bond on the Ethereum blockchain. Goldman Sachs, Banco Santander and Societe Generale also participated in the publication. Research has pointed to institutional adoption as a tipping point for widespread crypto adoption, and it appears we are quickly heading there.
Altogether, the increased availability of points of sale accepting Bitcoin as a medium of exchange and institutional investment in the space is likely to lead to greater acceptance of Bitcoin as a payment method in 2022.
After cryptocurrencies, decentralized finance (DeFi) is widely seen as the next frontier in the fintech space. DeFi offers the opportunity to create decentralized systems based on distributed ledger technology to facilitate peer-to-peer lending, create new securities such as stablecoins, or even introduce new models for corporate governance.
Regulators seem increasingly to be paying attention. In November, the European Council – the body that sets the EU’s policy priorities – announced its position in the Framework for Markets in Crypto Assets (MiCA), which will provide increased regulatory clarity around crypto assets and DeFi.
In the same month, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the United States issued a joint statement announcing that they would issue a set of policy guidance on cryptocurrencies.
The researchers cited a lack of regulation as a major barrier to mainstream crypto acceptance. Increased government oversight, along with a move by several countries to consider digital versions of their national currencies, is likely to lead to more regulatory activity in 2022.
Rise in NFT activity
2021 brought a new wave of sales of NFTs. An NFT can provide proof of ownership of digital art, for example, in the same way that a physical painting can provide proof of ownership of a Vincent Van Gogh painting.
Although NFTs began as a way to formalize ownership of digital art, they have since expanded to include other types of digital ownership, including digital real estate.
Sales of NFTs set new records – most recently raising $17.1 million at Sotheby’s. As a result, the auction house launched Metaverse, an NFT-only marketplace to facilitate the sale of digital business.
With the emergence of new NFT applications, this space is likely to continue to grow in 2022.
Despite these investment opportunities, we urge cryptocurrency investors to be skeptical of the claims they read in the online communities. At a minimum, cryptocurrency enthusiasts should do their due diligence before investing.
What will surely appear in 2022 are new scams and schemes. Take, for example, the SquidGame encryption that took advantage of the popular Netflix show but was a scam. Or a fake Banksy NFT card that sold for £244,000.
Research on retail investor behavior has found that some are highly susceptible to “afraid of getting lost”.
Therefore, it can be hard to turn down a tip from your hairstylist or your best friend’s cousin on your next hot coding opportunity. However, cryptocurrency investors must educate themselves on technology and the fundamentals of the financial markets if they are to participate wisely.
Cryptocurrencies, after all, are still speculative and not for everyone.