The year of the pandemic was a big one for cryptocurrencies as a whole as the ecosystem experienced a surge in both valuations and public interest due to the aggressive intervention of major central banks in their domestic economies and the accelerated adoption of digital solutions (and assets) during lockdowns.
Even though the crypto market as a whole continued its uptrend in the first few months of the year, certain negative catalysts including a crackdown on mining activities in China contributed to pushing valuations lower during most of the second quarter of the year.
Shortly afterward, the price of Bitcoin managed to bounce off its June-July lows to then move to all-time highs but shed some of those gains in the last two months of 2021 as the ecosystem as a whole experienced some deleveraging.
All in all, Bitcoin (BTC), a commonly accepted benchmark of this growing market, still managed to outperform most asset classes by producing a 60% gain to investors compared to 27% from US equities and 38.5% from commodities.
As we are starting a whole new year, investors might be wondering how cryptocurrencies and cryptocurrency stocks may behave based on current market conditions.
In this article, we will be sharing some variables that investors should keep an eye on to possibly predict the direction that the market may take as the year advances.
#1 – Inflation
The ultra-accommodative monetary policies adopted by central banks around the world have been one of the most important catalysts that fueled the latest rally in cryptocurrencies – especially on the tokens that are considered a long-term store of value as is the case of Bitcoin (BTC).
The limited supply of this digital asset along with its decentralized nature are some of the characteristics that crypto advocates highlight when arguing about the possibility of BTC becoming the world’s first digital store of value.
With inflation in the United States and other corners of the developed world possibly spinning out of control, the steps taken by central banks to contain an escalation in prices within their respective economies will likely play a key role in shaping the valuation of cryptos in 2022.
#2 – Increased Adoption
A recent survey from Pew Research Center indicated that 16% of Americans have “invested in, traded, or used” cryptocurrencies recently.
Meanwhile, an outstanding 86% of Americans have heard a little about the ecosystem, meaning that awareness is increasing.
The next step for cryptocurrencies in their path to becoming a stronger financial asset is mass adoption as a mean of payment.
Both 2020 and 2021 have been crucial for this particular endeavor as well-reputed companies including the electric vehicle giant Tesla and the digital payments processing platform PayPal have embraced cryptos.
The former has started to accept payments in the crypto assets for the purchase of its automobiles while the latter launched a platform through which individuals can transact with Bitcoin and a selected group of cryptocurrencies, allowing them to pay any of the millions of vendors that support PayPal with these assets.
If the adoption of cryptos as a payment method continues to increase in 2022, chances are that the key projects within the ecosystem may experience an increase in their respective valuations.
#3 – Ethereum 2.0
The widely-expected upgrade of Ethereum, which should have been completed by 2019, has been pushed back to June 2022 by the Ethereum Foundation.
The main objective of this upgrade is to transition the network toward the less energy-intensive proof-of-stake (PoS) protocol and away from the controversial proof-of-work (PoW) consensus mechanism that keeps powering the Bitcoin blockchain.
Another goal of this upgrade is to reduce transaction fees when using Ethereum. This network is considered the most important infrastructure blockchain at the moment as nearly 4,000 decentralized apps have been built and are powered by its blockchain.
A reduction in gas fees may continue to propel the adoption of Ethereum by developers from all across the world as a decentralized alternative to power their applications rather than relying on centralized servers and marketplaces.
This could result in an increase in the rate at which blockchain technology is adopted by top software firms and that may benefit the ecosystem as a whole.
Bottom line
A new year is just starting and cryptocurrencies will surely keep being a heated topic of discussion among professionals within the financial community. Trading strategies such as crypto arbitrage are still going strong. These digital assets have survived and thrived for the past 12 years but they still have a lot to prove as adoption and awareness are still at an early stage.