The past year has been particularly eventful in the crypto market, even by crypto standards. Price action has been spectacular in the aftermath of the Covid-19 crash.
Bitcoin recovered quickly and the long-awaited institutional adoption became more tangible. However, the rally marked a pause from May 2021, as Elon Musk reversed his decision to allow customers to pay for Tesla's cars in Bitcoin on the back of environmental concerns. This gave rise to an intense debate on Bitcoin's energy consumption.
Furthermore, China cracked down on the mining industry, prompting the "Great Mining Migration". After a pause of nearly three months, Bitcoin has resumed its upside trend ahead of the adoption of the crypto asset as legal tender by El Salvador. It has been quite a year and the one ahead is expected to bring many exciting new developments around ecosystem development, industry and investor adoption, and regulation.
Adoption: What to expect for the coming year?
Companies such as PayPal, Twitter, Robinhood, Maersk and others have started testing use cases for blockchain technology and crypto-assets. For example, in April 2021, PayPal began to allow US users to spend cryptocurrencies at millions of online merchants.
It has since gradually announced additional support for crypto, including the possibility to convert cash back from Venmo credit cards into crypto automatically. More recently, in August, PayPal announced it will expand the crypto trading function to the UK market.
Through such examples of these real-life applications, one can start testing the potential for the mainstream adoption of Bitcoin and crypto technology. It helps push the industry forward and test crypto's potential in the real economy.
Looking ahead, it’s likely this trend will stay as more companies explore the use cases and, regardless of the outcome, it’s expected this trend will work as a catalyst in the short term to drive the interest in crypto as an asset class.
Investor adoption: Hurdles remain, but are falling
In the past, institutional adoptions have been hindered by several factors including the lack of market infrastructure and regulation, market volatility, and the need for investor education to help gain a deeper understanding of the space. We have seen many developments in those areas over the past few years and expect a continuation and acceleration of this trend.
Market infrastructure has greatly improved with the development of institutional-grade trading and custody services. In turn, this has enabled the creation of many new access vehicles, such as regulated futures or exchange-traded products (ETPs), making it easier for investors to get crypto exposure than direct holdings. All heads are now turned to the US to see when the US Securities and Exchange Commision (SEC) will allow Bitcoin exposure in an exchange-traded fund (ETF).
The general level of education in the space is also improving, as most firms now have at least some form of crypto working group. We have witnessed this trend across all institution types, including multi-asset managers, investment banks and pension funds.
Regulation probably remains the main hurdle, as many actors indicate they need more clarity from regulators. In Europe, this can be particularly challenging, as countries can take different stances on crypto, and their regulators tend to focus on different sub-areas of the crypto space, be it custody and trading or retail protection and product. Multi-national investors have to navigate this fragmented landscape, which can be very challenging.
Bringing the crypto space under the regulatory umbrella seems to become a major priority. Most countries in Europe and North American do not call for an outright ban on crypto-assets and related services. But building a framework around such a young and innovative asset class is a process that takes time and needs to be done right.
The El Salvador experiment: Will Bitcoin be a successful legal tender?
In September this year El Salvador became the first country to adopt Bitcoin as legal tender for daily transactions alongside the US dollar. The initial roll-out of the wallet experienced some technical issues on the day. The move also sparked concerns amongst investors as this could bring volatility to the country's reserves, while its liabilities are mostly denominated in dollars.
This event marks the first significant Bitcoin adoption by a country. Should this develop in the right direction, it could set the example for other countries to "Bitcoinise" part of their economy. This remains a very long shot, and the coming year might be key for the potential long-term adoption of non-CBDC crypto assets.
The year ahead
The crypto ecosystem is fast-paced, and we expect it to continue moving fast next year. Regulatory developments will be key to lifting the remaining hurdles barring institutional investors from entering the space and will help the ecosystem better manage its product offering.
Non-Fungible Tokens (NFTs) is an important growth area, this is a unique digital asset that represents items like digital artwork and collectables. NFTs are being exchanged in increasing volumes, sometimes for extravagant sums of money.
Decentralised Finance (DeFi) has also gained in popularity, opening a whole new universe of opportunities for traders. NFTs and DeFi will continue to thrive and could potentially reshuffle part of the ecosystem as several promising software platforms compete for a share.
Florian Ginez is an associate director, quantitative research at WisdomTree. The views expressed above are his own and should not be taken as investment advice.