Cryptocurrency in 2022: Why You Should Care and What to Expect

By Balaj Singh, CFA®, CAIA® | Published: April 2022

Last year marked significant progress for the cryptocurrency market, with several noteworthy moments from 2021 that made headlines, including:

• Bitcoin surpasses $1 trillion in market value
• Coinbase IPOs at a $85.8 billion valuation
• China banned cryptocurrency
• El Salvador adopted bitcoin as legal tender

Whether or not you own cryptocurrency outright, we believe its popularity and impact made new milestones last year. The Pew Research Center estimates that at least 86% of Americans have heard about cryptocurrency and 16% have invested in some cryptocurrency (up from 1% in 2015).¹ As a means of commerce, a survey cited by Deloitte estimates around 2,300 U.S. businesses now accept cryptocurrency.² Building on crypto’s momentum, the mayors of Miami and New York City declared their intentions to implement crypto friendly policies to be known as the premier crypto capitals of the country.

Before policymakers took note of crypto, large tech companies like Tesla and Block (formerly known as Square) added bitcoin directly to their balance sheets. Payment companies like Visa and Mastercard embraced settling transactions in crypto. Chipotle and Burger King announced bitcoin giveaways as part of their promotional campaigns. Basically, if you own an investment that tracks the S&P 500³, it is possible you’ve been indirectly exposed to cryptocurrency.

In 2022, the cryptocurrency market may continue to mature and adoption may become more widespread, there are legal, environmental, and financial developments to look out for.

Road Map to Regulation
U.S. banking regulators have laid out their agenda for 2022 and will focus on identifying and assessing the safety, soundness, and compliance with owning crypto-assets⁴. A pressing issue of crypto-asset activity that regulators will focus on are stablecoins. These are tokens whose value is tied to the price of an existing asset like the U.S. dollar. This is controversial to regulators because there are concerns about whether these stablecoins hold enough assets in its reserves to justify its value being equated to the dollar. Regulators remember the scars of the great financial crisis of 2008 all too well, when the collateral behind the housing and mortgage crises became suspect and risk appetites repriced aggressively. In order to avoid systemic risk, crypto experts expect a great deal of legal scrutiny in the years to come.

Energy Efficiency
A major critique over the investment in cryptocurrencies is that cryptocurrency mining is highly energy intensive. Bitcoin and other cryptocurrencies are created or "mined" by high-powered computers competing to solve complex mathematical puzzles, which consume energy and fuel planet-warming emissions unless they are run on power from renewable sources. Bitcoin mining is currently estimated to account for about 0.55% of global electricity consumption, using up more power than Malaysia does in a year, according to an index compiled by the University of Cambridge.⁵ In 2022, we believe the industry will have to address its sustainability challenge in a real way. One potential solution is the adoption of proof-of-stake method of validating transactions. This is an alternative to cryptocurrency mining as it does not use extensive computing power.

Expansion of Crypto Investing Options
Outside of owning cryptocurrency directly by purchasing it on an exchange like Coinbase, 2021 saw the proliferation of crypto-centric companies and crypto-linked investment products come to market for investors. Of the varied offerings that became available, the most significant release was the ProShares Bitcoin Strategy ETF (ticker BITO), which accumulated over $1 billion in just two days. That’s the quickest an ETF (exchange traded fund) has been able to reach that feat, breaking the record previously held by the Gold ETF (ticker GLD), having crossed the $1 billion mark in three days after it launched in 2004.⁶

We expect the trend of crypto-related investment options to continue in 2022. From companies going public that “mine” cryptocurrency, to ETFs that invest in companies that support the infrastructure of crypto economy, there should be no shortage of opportunities that investors will have to invest in this space.

No one will argue that technological progress is inevitable but investing in this progress through cryptocurrency carries its own unique risk. With the complexity that comes with this market, it may be beneficial to partner with a financial advisor to analyze whether this may be a suitable investment for you to make or to understand the exposure you may already have.

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¹ Perrin, Andrew. “16% Of Americans Say They Have Ever Invested in, Traded or Used Cryptocurrency.” Pew Research Center, Pew Research Center, 11 Nov. 2021, https://www.pewresearch.org/fact-tank/2021/11/11/16-of-americans-say-they-have-ever-invested-in-traded-or-used-cryptocurrency
² “The Business Benefit of Using Cryptocurrency.” Deloitte United States, 1 Sept. 2021, https://www2.deloitte.com/us/en/pages/audit/articles/corporates-using-crypto.html.
³ The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices.
⁴ By “crypto-asset,” the agencies refer generally to any digital asset implemented using cryptographic techniques.
⁵ “How Much Energy Does Bitcoin Actually Consume?” Harvard Business Review, 6 May 2021, https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume.
⁵ Contributor  Namcios Bitcoin Magazine. “Bito Bitcoin ETF Becomes Fastest ETF Ever to Hit $1 Billion Aum.” Nasdaq, https://www.nasdaq.com/articles/bito-bitcoin-etf-becomes-fastest-etf-ever-to-hit-%241-billion-aum-2021-10-20.

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About the Author – Balaj Singh
Balaj Singh, CFA®, CAIA® is a Research Analyst on West Capital Management’s Research Team and supports West Capital Management’s Investment Committee. Balaj is responsible for investment due diligence on managers and strategies, portfolio construction, and performance reporting. Prior to joining West Capital Management, Balaj was a Senior Stock Operations Associate at Broadridge Financial Solutions, Inc. and a Client Service Analyst at Hamilton Lane Advisors. Balaj graduated from Rutgers University with a Bachelor of Science in Finance and Accounting with a Minor in Economics. Balaj has earned the CFA® Designation and the CAIA® Designation.

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This communication is provided by West Capital Management (“WCM” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this commentary is to be construed as a solicitation to buy or sell a security nor a recommendation to purchase crypto currencies or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that WCM believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.

Because crypto assets are a new technological innovation with a limited history, they are a highly speculative asset. Future regulatory actions or policies may limit the ability to sell, exchange or use a crypto asset. The price of a crypto asset may be impacted by the transactions of a small number of holders of such crypto asset. Crypto assets may decline in popularity, acceptance or use, which may impact their price.

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Virtual currencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional fiat currencies. Profits and losses related to this volatility are amplified in margined futures contracts.

Purchasing virtual currencies on the cash market – spending dollars to purchase Bitcoin for your personal wallet, for example – comes with a number of risks, including:

• most cash markets are not regulated or supervised by a government agency;
• platforms in the cash market may lack critical system safeguards, including customer protections;
• volatile cash market price swings or flash crashes;
• cash market manipulation;
• cyber risks, such as hacking customer wallets; and/or
• platforms selling from their own accounts and putting customers at an unfair disadvantage.

It’s also important to note that market changes that affect the cash market price of a virtual currency may ultimately affect the price of virtual currency futures and options.

If you are considering the purchase of a digital coin or token, it is important to weigh factors that could impact its current or longer-term value, including:

• The potential for forks in open-source applications that could split away market participants, increase the number of digital coins, or make your coins obsolete.
• Decreasing mining or validation costs (if price is tied to those factors).
• Acceptance of other currencies, coins, or tokens for offered goods and services.
• The link between the value of a digital coin or token and the offered product or service.
• Adoption of the digital coin or token as a broad medium of exchange or store of value.
• Future competitors or technological changes that could disrupt the underlying business.
• Future demand or uses for an application, network, product, or service.
• Liquidity in the market for a specific digital coin or token.
• Changes to the underlying technology that could devalue your digital coins or tokens.
• Risk of theft from hacking.