What can we expect to see in the cryptocurrency world in 2022?

Elon Musk

Following a blockbuster year for the cryptocurrency markets across the world, Business Leader explores what the future holds for the industry. With Bitcoin being accepted as legal tender for the first time, controversial celebrity involvement, and new ‘coins’ being introduced last year – 2022 is set to accelerate its acceptance and adoption. However, as it is with any disruptive entity, there are often more questions than answers regarding its potential influence on global economies.

Following a tumultuous year, and the increasing influence of high-profile entrepreneurs and investors – most notably Elon Musk – there is set to be more disruption on the horizon. Despite the constant volatility, investors swarmed towards the crypto market in 2021, due to greater access to information, more platforms offering opportunities to invest, and new blockchain protocols, which supported more opportunities in the decentralised financial space (DeFi).

At the start of 2021, the value of the global market was $1.49bn, and Allied Market Research reported that it will rise by a CAGR of around 12.8% each year until 2030. However, with such an erratic marketplace, this estimate could be dwarfed by the final total, should market conditions change – and they will.

The year ahead

With 2021 being such a breakthrough year for the crypto industry, coupled with the known volatility of the markets, it can be hard to predict what might happen in the weeks ahead, let alone several months.

However, that key theme will remain according to Giles Coghlan, Chief Analyst at HYCM. He comments: “Volatility ruled the markets in 2021, and this year I expect to see more of the same. When markets are risk-averse, we can expect to see selling in the crypto market, especially given the fact that this is a newer currency. The market isn’t mature enough to survive major selling, so we may see some flash crashes throughout the year.

“Speaking more generally, we can expect crypto to continue making headlines in the year ahead, and in addition to the continued discussion about crypto’s role, I suspect that there will be more calls for the integration of cryptocurrencies when used for purchases. If Tesla owners aren’t buying their cars with cryptocurrency, then who on earth is?

“That being said, I believe Bitcoin and Ethereum have been the winners in the industry in 2021, and they should both remain supported in 2022.”

Nigel Green, CEO and Founder of deVere Group continues: “We can expect to see increasing interest and demand from institutional investors who came off the sidelines in a significant way in 2021 and we will see this continue this year. In turn, this will drive retail investors to increase their exposure to cryptocurrencies, which will help fuel mass adoption.

“I also expect to see cryptocurrencies that are involved with fintech development, such as Ether, Solana and Cardano, are likely to do particularly well in 2022.”

Another niche market within the crypto space over the past year has been the rise of ‘meme coins’. However, these might just be a short-lived fad.

Alexey Kirienko, CEO of Exante, comments: “Without naming any particular coins, meme coins are the ones most likely to remain out of favour as investors realise some of them have near zero use in real-life applications. Some like Doge might be able to bark louder given Elon Musk’s involvement, but any spikes are likely to be short-lived for this group of cryptos.”

And as more cryptocurrencies become available, and the already-established ones like Bitcoin and Ethereum continue to grow – there will be growing calls for regulation and a central bank-type institution to monitor the industry. Could this happen in 2022?

Martha Reyes is the Head of Research at digital asset exchange and brokerage platform, Bequant. She comments: “This year we anticipate more regulatory clarity and potentially new legislation to fill in the gaps. The market has become a size that authorities can no longer ignore, and politicians are becoming more knowledgeable, with some supporting digital assets. Clarity should be a positive for the industry and could attract mainstream investors that have been sitting on the sidelines.

“In addition to their remit of consumer protection, regulators look at systemic risk. The market cap of digital assets and the total value locked in decentralised finance, while relatively small, is pushing them to act as they can foresee continued growth and integration with traditional finance. Many fund managers, family offices and hedge funds now see the benefit of holding even a relatively small weighting in crypto, especially given its lack of historical correlation to other asset classes.

“Finally, DeFi will find greater mainstream adoption, allowing the unbanked and SMEs to access financial services. DeFi products will become more sophisticated and centralised exchanges will help to expand access.”

Appealing to traditional investors

It has often been this unregulated, ‘Wild West’ approach that has failed to appeal to more traditional investors, who instead look to invest in companies and the stock market. But is this starting to change as crypto is rapidly becoming more mainstream?

Alpesh Patel OBE, Founder and CEO at Praefinium Partners, provides his analysis.

He comments: “In 2022, we will see more coins, more people making a lot of money very quickly, and more people losing a lot more quickly. There will be more coins linked to the Metaverse, DeFi and NFTs – and every fad you can imagine. Basically, where there is noise there is money to chase it. Is that bad? Well, going to Las Vegas is not bad as long as you know you are in Las Vegas.

“Equally, are these people buying day one Microsoft? They think they are. Are they wrong? Crypto is like modern art. Some of it will hold value, even though you may think it is worthless junk. Some of it is worthless junk. Is all modern art rubbish? Well, I think Pollock is b*llocks, but some guy in Japan or Saudi Arabia is willing to pay millions for each unit.

“With investors today, they don’t know it is just modern art. And like modern art, it causes divided opinions between those who think it is junk and a gamble with no intrinsic value and those who think it is the future of human civilisation.

“Volatility does not help. We associate volatility with gambling, of course, and these assets are volatile. And we associate bricks and mortar with safety. So, some of it is a perception problem. Some is reality.”

Although there’s a wide range of views over the role crypto will play in the future of business and economies in the years ahead, one of the main detractors for traditional investors taking an interest in the industry is the volatility factor. For example, Bitcoin’s value rose and fell by more than 50% over the year – too risky an investment from investors who may not have as much of a grasp on the industry compared to what they have always known. But is this now changing?

Green comments: “Whether it is Bitcoin, or any of the current generation of tokens, or not, cryptocurrencies are here to stay. Meanwhile, financial traditionalists are viewing cryptocurrencies the way traditional stores used to view online retailers such as Amazon. But digital currencies have already forever changed the way the world handles money, makes transactions, does business, and manages assets. The ‘old guard’ is, I believe, finally waking up – as evidenced by Wall Street giants now having crypto operations for their wealthier clients.”

Reyes continues: “Some traditional investors see crypto as a bubble. Many have shifted in recent years; particularly successful macro investors and, latterly, venture capitalists have become excited about the space, as demonstrated by record investment levels. Also, the 24/7 nature of the market means traders can run round-the-clock operations in the way they can’t in traditional markets.”

What changes are needed?

Despite the apparent growth in both number and quality of investors into the crypto market, one of the biggest criticisms the industry has faced over recent years has been around the challenges it presents, making it less likely for mass adoption. But what can be introduced to help the industry scale in the UK and around the world?

Green said: “What’s needed is a strong regulatory framework to be established and approved at an international level, as cryptocurrencies are becoming an increasingly mainstream part of the global financial system. This will help protect investors, make the sector itself more robust, tackle cryptocurrency criminality, and reduce the possibility of disrupting global financial stability, as well as offering a potential long-term economic boost to those countries which introduce it.”

However, Kirienko disagrees with government involvement: “Any regulation to help protect investor funds and coins from cyber theft is welcome. Otherwise, the less governments meddle in crypto, the better it will be for everyone involved. The whole point of crypto as an asset class is that there is no central authority.”

Celebrity influence

One of the main trends and drivers of this interest has been down to the influence of celebrities outside of the traditional investment space. However, much like many other areas of crypto, it is both a benefit and a challenge for those interested in the sector.

Coghlan comments: “As with many things in life, this can be a double-edged sword. The higher profile celebrities like Elon Musk add a certain amount of legitimacy to the crypto market. However, this involvement can also cause huge surges in volatility as celebrities back and withdraw their support – we need only look to Elon Musk’s tweets for evidence that this is the case. That said, on net balance, famous investors are good for the long-term crypto market.”

But, with celebrity influence and an ever-evolving market, is this the key to growth?

Green said: “Tesla and Space X Founder Elon Musk, Twitter Founder Jack Dorsey, and Ark Investment’s Cathie Wood, amongst many others have all recently advocated for cryptocurrency and talked about its massive future potential.  These three alone are some of the most important and forward-thinking business leaders of our time. What they say matters. The message from mega-influencers is clear: crypto is the inevitable future.

“However, investors need to avoid the mass hype and hysteria generated by celebrities. We’ve seen many of these small-scale investors – typically inexperienced, younger people who might not necessarily have the financial resources to be resilient against usually highly speculative and volatile investments – having played a costly game.

“If you want the thrill or novelty of shooting for a quick buck driven by social media frenzies, you really should ensure that you have a sound, diversified, long-term plan beforehand. Otherwise, you’re gambling, not investing.”

And it is this inexperienced investor that have succumbed to a growing and concerning trend within the industry – the ‘celeb pump and dump’ crypto schemes.

Celebrities such as Kim Kardashian and Floyd Mayweather are being sued over allegedly misleading investors to get involved in these cryptocurrency ‘scams’. But what are they?

Adam Nasli, Head Analyst at international broker comparison site BrokerChooser stressed: “Pump-and-dump schemes refer to an illegal manipulation technique when an asset’s price is pumped up intentionally by spreading misleading information. When price is increased substantially, the manipulator dumps its shares to the market, causing a significant price drop and leaving other investors left with worthless assets. Pump-and-dump schemes usually target small, barely known assets as the price of these assets can be influenced more easily due to lower trading volume. Also, pump-and-dump schemes prefer assets with lower regulation requirements, such as crypto.

“Barely known crypto tokens/projects promoted by influencers are most often super risky and end up with big jumps and falls in their prices.

“The regulation around this kind of promotion is a grey zone, and the customers should be really careful because the associated risks, like the extremely high volatility, are not highlighted in most cases.”

Challenging times ahead?

In such a fast-paced market, with constant uncertainty, one of its biggest issues in favour of mass adoption has been that it is almost impossible to predict what will happen in the future. And in recent months, the industry has struggled.

Coghlan explains: “The world is slowly withdrawing from a digitally intensive time, after the initial shock of the pandemic. As Covid-19 eventually moves towards endemic status, will the same enthusiasm for all things digital remain?

“This is a question that investors should be asking. Others will be asking whether the concept of Bitcoin as ‘digital gold’ is overhyped. I don’t believe that it is but given that there are thousands of lesser-known cryptocurrencies, we can expect some to fade into the background eventually.”

In the United States, efforts are being made to stabilise the market through ‘stablecoins’. These are a type of crypto that derive their value from external assets, such as the US Dollar or the price of gold. With the growing calls for a central bank and more regulation, could the future look brighter for the industry?

Tammy Da Costa, Analyst at DailyFX continues: “With digital assets now on a downward trajectory, the 2022 outlook appears to be rather pessimistic and the downtrend may still continue for the foreseeable future.

“However, central banks are now developing their own digital currencies, which could potentially support prices of more centralised crypto’s, such as Cardano, USDC and other stablecoins.

“For the future trajectory of the industry, I believe that the fundamental backdrop and interest rate hikes will continue to be the two primary catalysts for price action, which could see further correction in prices before stabilising.”