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). As a means of commerce, a survey cited by Deloitte estimates around 2,300 U.S. businesses now accept cryptocurrency. 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 500, 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-assets. 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.
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. 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.
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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