Last week, the cryptocurrency market received a reminder of regulatory risks: the proposal of the Central Bank to ban the mining and circulation of cryptocurrencies in Russia led to a drop in the bitcoin rate to a five-month low. But this market is no stranger to ups and downs.
Last year, cryptocurrencies set several records at once: in April, their total capitalization for the first time exceeded $2 trillion, and in November — $3 trillion. On this wave, many investors began to regard cryptocurrencies as a protective asset against accelerating inflation. We tell you if this is so and what place in the portfolio they can occupy.
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Why cryptocurrencies were growing in 2021
In 2021, the cryptocurrency market set several records: in April, its total capitalization exceeded $2 trillion for the first time, and in November — $3 trillion. Despite the correction at the end, just last year it grew by 185% – from $773 billion to $2.2 trillion.
The price of bitcoin, the most popular and largest cryptocurrency by capitalization, has grown by 60% over the year, significantly outperforming stocks (the S&P 500 index rose by 27%) and bonds (the Vanguard Total Bond Market Index fell 3.49%). Although for Bitcoin itself, this is the worst indicator since 2018.
The growth in the value of bitcoin was facilitated by its growing acceptance among investors, businesses and individual regulators. Tesla founder Elon Musk said in July that the company would accept bitcoin as a means of payment if it was mined using green energy.
In September, Bitcoin became an official means of payment in El Salvador for the first time. Another positive development was the launch in the US of the first exchange-traded investment fund (ETF) pegged to bitcoin futures.
In addition, in anticipation of inflation accelerating, private investors and even companies began to invest in bitcoin, hoping that, due to the limited issue, it would become “the new gold,” JPMorgan noted.
In September, Morgan Stanley was the first of the largest American banks in the United States to offer its wealthy clients to invest in bitcoin funds. Later, JP Morgan clients also received this opportunity. As the Financial Times wrote with reference to a study by the Interprets fund, by 2026 hedge funds plan to hold 7.2% of their assets in cryptocurrency.
Software maker MicroStrategy, according to the end of 2021, held $ 5.9 billion in bitcoins – the company even issued bonds and conducted an SPO to buy cryptocurrency.
Wealthy investors have also become more supportive of cryptocurrencies. Interactive Brokers founder Thomas Petteril bought an ad page in The Wall Street Journal (WSJ) in 2017 to warn about the dangers of bitcoin futures, and now recommends keeping 2-3% of personal wealth in cryptocurrencies in case fiat ones “go to hell,
”reminds Bloomberg. Ray Dali, the founder of the world’s largest hedge fund, Bridgewater Associates, recently revealed that he has “some” bitcoin and Ethereum in his portfolio, even though he questioned their value as a store of value months earlier.
Not only bitcoin
The success of bitcoin pushed the cryptocurrency market up all year, although it gradually gave way to altcoins (as all cryptocurrencies that appeared after bitcoin are called), growing even faster. According to CoinMarketCap, in 2021, the share of bitcoin in the total capitalization of the crypto market decreased from 70.2% to 40.1%, the share of Ethereum increased from 11% to 20.2%, and other altcoins — from 18.8% to 39.7% .
Among the growth leaders is the meme cryptocurrency Dogecoin (DOGE). One of the main reasons for its success is the support of Elon Musk, who regularly wrote about the altcoin on Twitter. In December 2020, the founder of Tesla wrote “One word: Doge”, after which the cryptocurrency went up by almost 30%.
In January, the price of Dogecoin jumped more than 10% after the businessman announced that it would be accepted as payment for accessories and other goods at the Tesla store. Dogecoin is also popular with Reddit traders who have decided to overclock the cryptocurrency after the success with GameStop.
But not only hype fueled altcoins in 2021. If the cost of bitcoin grew due to the growth of interest from companies, then the main altcoin – Ethereum – was helped by the growth of interest from developers. The increasingly popular NFTs and Defib (decentralized financial services) were created on its blockchain.
Recently, it has been facing a scalability issue: as more people use the Ethereum blockchain, it has become very slow. These difficulties and high fees have given space for other altcoins to rise. The fastest growing Polygon token (MATIC) is a second-level sidechain compatible with the Ethereum blockchain that works faster and with lower fees.
The fast-growing Solana (SOL) project is also trying to compete with Ethereum. According to Bank of America, it can become a payment system like Visa in the digital asset ecosystem. Solana can process about 65 thousand transactions per second (Ethereum – tens, not thousands) with an average transaction fee of $0.00025, however this blockchain is less decentralized and secure.
Prospects for cryptocurrencies
Enthusiasts hope for further acceptance of cryptocurrencies. A big step towards this will be the emergence of metaverses, attention to which has increased dramatically in recent months (we wrote about this here). For cryptocurrencies, at least, it will be possible to buy digital goods.
Meta (former Facebook) founder Mark Zuckerberg pointed out that the creation of the metaverse provides support for cryptographic and NFT projects. Walmart, which revealed its metaverse plans in late December, filed for several new trademarks, which indicate that the corporation plans to launch its virtual currency and NFTs.
The launch of the first ETF based on bitcoin futures may be the beginning of the development of regulated crypto investment instruments. The next step should be the approval of a Bitcoin spot fund that closely follows the price of the cryptocurrency (read more about the differences between the two types of funds here). This can attract even more investors, as it will allow investing in cryptocurrencies through reliable exchanges.