Bitcoin’s Major Trends For 2022 (BTC-USD)

Stock Market


Bitcoin coins on a black background.

Phira Phonruewiangphing / iStock Editorial via Getty Images

Although it’s been around for over a decade, Bitcoin (BTC-USD) has surged in popularity over the last few years. Slowly, more and more investors have entered the asset class after seeing its strong returns since the bubble popped in 2018. Despite these strong returns, Bitcoin is still in its early stages of adoption. Like other emerging industries, many different factors can affect volatility and performance. Below are the major trends that will affect the world’s most popular cryptocurrency in 2022.

CBDCs

For years, central banks have discussed developing their own digital currency as a means for faster, cheaper, and more secure transactions. While many countries are still in the development phase, a few have recently launched their CBDC. Most notably, China has been testing its digital yuan in select cities and is allowing foreigners to use it for the first time during the Olympic Games. Up to this point, China has struggled to drive adoption for its CBDC, with the digital yuan making up less than one percent of transactions in the country. However, these statistics are based on the testing phase, and currently, only select merchants accept it as payment. While limited use cases and privacy concerns are constraining the project’s success, we expect that to change as China continues to roll it out nationwide.

India announced this week that it will launch its digital rupee by April 2023, giving another one of the world’s largest economies a timeline for rollout. On the flip side, the US is taking its time in deciding whether a digital dollar is the right move. The US is the largest country still in the research phase of the CBDC project, while all other large economies are in the development or pilot phase.

CBDC tracker

Atlantic Council

Source: Atlantic Council

Many are worried that a digital dollar will give the government more control, allowing it to track all transactions in real-time. In the US specifically, privacy concerns pose a considerable risk to the success of the digital dollar. The good news is the Fed understands that people likely will not adopt a system without privacy. Last year, Fed Chair Jerome Powell said, “The currency that is being used in China is not one that would work here. It’s one that really allows the government to see every payment for which it is used in real time. ” Likewise, the Fed issued its white paper on CBDCs last month, stating that a successful CBDC would need to work within the current network of private banks rather than be issued directly by the Federal Reserve to customers. Using this kind of system addresses the privacy issue, but also eliminates some of the benefits of using a peer-to-peer system without intermediaries. As a result, Bitcoin remains the better option for transactions that require intermediaries in the traditional financial market. Therefore, although CBDCs represent improvements over the current system, it does not replace the need for Bitcoin. Bitcoin was created to solve problems that still exist under a digital currency system.

Regulation

The biggest risk for Bitcoin lies in how countries regulate it. An outright ban by most countries, which China has already implemented, would obviously cripple Bitcoin’s use case. China implemented its ban due to fears of financial instability and the currency being used for money laundering. Meanwhile, Russia has yet to decide on where it stands. Last month, Russia’s central bank called for a blanket ban on cryptocurrencies. The proposal would allow citizens to own cryptocurrency, but not use it as a means of payment or any related activity. On the flip side, Russian Minister of Finance Anton Siluanov recommends regulation over an outright ban, suggesting the legalization of crypto trading through banks. With Russia and China viewing Bitcoin as a threat to each country’s control, investors should keep a close eye on how this plays out. Softer than expected regulation by Russia or a pullback of regulation by China would be very positive for Bitcoin. An outright ban by both countries would hurt, but it will likely need to be followed by several other countries for it to destroy Bitcoin’s viability. It’s important to note that certain countries have already softened their stance on Bitcoin. Towards the end of 2021, India was discussing the ban of any cryptocurrency not regulated by the government. Just this week, India flipped its stance, stating that it will legalize crypto and tax its income.

While outright bans from countries present risk for Bitcoin, most regulation is expected to help legitimize Bitcoin and drive adoption. Clear, defined rules on how governments treat Bitcoin will reduce uncertainty and incentivize institutional players to join the market. Additionally, increased regulation could help curb illicit activity, as the cryptocurrency market has been haunted by stories of scams, cyberattacks, and money laundering.

Bitcoin as Legal Tender

In 2021, El Salvador became the first country to adopt Bitcoin as a legal tender. With over 70% of its unbanked population and 22% of its GDP coming from remittances, El Salvador saw Bitcoin as a way to increase financial access for its citizens and improve quality of life. After adopting Bitcoin as a legal tender, El Salvador launched its own digital wallet, Chivo, which now has over 3.8 million users, representing 84% adoption among eligible citizens.

Chart of Chivo Wallet Users

Ark Invest

Source: Ark Invest

In addition to increased financial access, Bitcoin as a legal currency allows developing countries to limit the risk associated with being dependent on a foreign country’s monetary policy. For example, in 2001, El Salvador officially adopted the US dollar after previous rampant inflation devalued its own currency. While this adoption increased economic stability, it limited the Salvadoran government’s ability to implement monetary policy during financial downturns. Regardless, the US government still implemented monetary policy based on its own domestic needs. This leaves El Salvador to face the effects of a monetary policy targeted for a different economy. While adopting Bitcoin does not allow El Salvador to implement its own monetary policy, it eliminates the risk associated with the dependency on another country’s currency.

Now, that’s not to say El Salvador’s Bitcoin adoption is not extremely risky. Since it became legal tender roughly six months ago, Bitcoin’s price has been down over 50% at one point. Its current volatility is not at all desirable for a currency, and it has placed El Salvador in hot water. This week, the IMF urged the country to remove Bitcoin as a legal tender, indicating it would be difficult for the country to get a loan from them.

Looking ahead, although Bitcoin does provide benefits as a currency, will other countries adopt it anytime soon? Experts believe that a few more will indeed do so in 2022, pointing mostly to Latin American countries as well as a few in the Middle East. I believe it might be longer before this happens, at least until volatility decreases over time. For these countries, it’s the ultimate risk, and will either end in cascading failure or be the greatest wealth transfer the world has ever seen.

Institutional Allocation

Many people argue that for Bitcoin’s price to rise significantly, there will need to be a large influx of money from institutional players. We saw this trend develop significantly in 2021. As of November 2021, 8% of Bitcoin’s supply was held by countries, corporations, and exchange-traded products. Corporations have brought attention to Bitcoin, with companies like Tesla allocating 8% of its cash to Bitcoin early last year. In total, corporations own just over 2% of Bitcoin supply on their balance sheets, while exchange-traded products make up just over 4%.

In Cathie Wood and Ark Invest’s recent annual report, the famed investor laid out how institutional ownership could drive Bitcoin to over $ 1M per coin by 2030. She noted that if S&P 500 companies allocate 5.0% of their cash to Bitcoin, that would give Bitcoin a market value of $ 4.2T alone, or $ 200,000 per coin. Likewise, if Bitcoin made up 2.6% of the institutional asset base, that would add $ 4.1T in market value. Nation-state treasuries allocating 1.0% of reserves to Bitcoin would add another $ 3.8T in value.

Bitcoin Price Prediction

Ark Invest

Source: Ark Invest

Bitcoin allocation improves a portfolio’s risk / reward ratio, offering a hedge against inflation and foreign exchange risk with high-upside. Whether or not institutional investors believe in Bitcoin, it is likely many will allocate a portion to the asset class due to its risk / reward improvement.

Exchange-traded products are also a hot topic for 2022. Many Bitcoin supporters have been looking for a spot ETF to be approved in the US after several were denied last year. Just this week, the SEC asked Bitwise to address its concerns regarding the company’s ETF listing. While that does not mean approval is right around the corner by any means, it signals the SEC’s openness and increases the likelihood of approval this year.

Conclusion

Overall, central bank digital currencies, Bitcoin as legal tender, and institutional investment could play a big role in Bitcoin’s adoption this year. More importantly, investors need to keep an eye on how governments across the globe are regulating Bitcoin. Things can change rather quickly in the crypto market, so it’s important to keep your finger on the pulse.



Source link

Leave a Reply

Your email address will not be published.