A decade ago cryptocurrencies were largely unheard of. There are now over 16,000 cryptocurrencies and digital tokens and their number is growing every day.
There appeared to be four main drivers behind the growth in cryptocurrencies and derivative products use in 2021:
- Adoption by businesses as payment method
- Recognition by national and local governments
- Recognition by regulatory agencies
- The development of new uses for existing crypto related technologies
Acceptance as a payment method:
The transformation of cryptocurrencies from investment to actual payment sources really began in March 2021. After initially offering US users the opportunity to buy and sell cryptocurrencies in 2020, global payment provider Paypal began accepting payment in Bitcoin, Ethereum and Litecoin from US based users. Also in March 2021 Electric car producer Tesla began to accept payment via Bitcoin. However, due to concerns around the type of energy used to mine Bitcoin, the company stopped accepting Bitcoin until such time that all Bitcoin mining is guaranteed to be powered by renewable energy sources.
Recognition by governments as a legitimate, valuable currency:
- The first city coin was launched in Miami, Florida in August 2021. The so-called “MiamiCoin” allowed Miami residents to hold and trade the asset on behalf of the municipality. Users who agreed to run the software for these keep 30% of the coins they mint with 70% going to the city of Miami.
- In February 2021 the Canadian regulator registered the first Bitcoin ETF in North America.
- Brazil launched its first Bitcoin ETF in February 2021 and Dubai launched one in June 2021.
- In September 2021, El Salvador recognized Bitcoin as legal tender and even announced plans to issue Bitcoin bonds. With the January 2022 fall in the value of Bitcoin, the country is actively purchasing the cryptocurrency to increase its Bitcoin reserves.
Recognition by regulatory agencies:
Regulators globally are recognising the growing importance of cryptocurrency assets to investor portfolios and are developing legal frameworks that include consumer protection and tax applications. For example, the US Internal Revenue System (IRS) revealed in March 2021 that it had created a team specializing in analyzing cryptocurrency transactions to identify crypto gains omitted by users in their tax returns.
The development of new uses for existing crypto related technologies and provision by major market players:
The Ethereum network is used for a wide variety of applications, from NFT ownership to smart-contracts. Ethereum has experienced a greater growth than other cryptocurrencies mainly due to the fact that its blockchain is home to a wide range of applications. Ethereum and its smart contracts allow developers to use the blockchain of the second largest cryptocurrency by market capitalization to host their apps including:
- Ethereum as a base for non-fungible tokens (NFT). These are digital tokens for a unique copy of a piece of art. It cannot be exchanged or replaced with another similar token. This has allowed painters, sculptors, musicians and others to find a new way to monetize their works. Apart from selling the physical copies of their works, they can now sell their digital versions.NFT. Although NFTs can also be developed on other platforms, Ethereum is still the first choice for NFT developers due to its popularity within the crypto community and it features tools developers find useful for other projects.
- Ethereum can be found in decentralised finance (DeFi). DeFi is a peer-to-peer financial service on public blockchain. Thanks to DeFi, users can exchange digital money without the need for a middleman. Ethereum is currently used in about 66% of the current DeFi market in terms of total value invested in these projects and, based on network effects, may grow even further in importance for this product.
There is also the growing crypto offering by major asset managers including Goldman Sachs, Blackrock, Morgan Stanley and State Street. They have been encouraged by the public listing of cryptos products:
- In April 2021 Coinbase was publicly listed on the Nasdaq stock exchange.
- In October 2021 the US Securities and Exchange Commission (SEC) gave the green light to the first exchange-traded fund (ETF) based on Bitcoin futures. The Bitcoin Strategy ETF from ProShares is now listed under the ticker BITO on the New York Stock Exchange (NYSE).
As we’ve shown in the second part of our crypto review, there are a number of reasons that the cryptocurrency product market has grown. Read our next installment to learn more about what we anticipate may continue to move the market in 2022.