Q9 Markets: Wrapping Up

23th December 2021

Q9 Capital: www.q9capital.com

2021 Review: The Year Crypto Went Mainstream

It’s that time of year again when folks and firms across the globe reflect on the past twelve months and attempt to make predictions for the next dozen — and at Q9 we’re no different. Here’s our recap of the 12 themes of crypto in 2021 and some crystal ball divinations for 2022.

O Come All Ye Faithful

2021 will be remembered as the year crypto truly went mainstream. Crypto markets surged to a total market cap over $3 trillion for the very first time with both Ethereum and Bitcoin printing fresh all-time-highs along the way. On November 10th Bitcoin reached $68,789, surpassing Facebook in market capitalisation. Ethereum peaked at $4,891 six days later. Brand new industries emerged such as decentralized finance, the metaverse and NFTs, and many former crypto-naysayers bought in.

Yet twelve months ago the value of all cryptocurrencies combined was only $800 million. How did we get to where we are today? Here are our top 12 takes from 2021:

1. Making COIN. Hailed as a watershed moment for crypto, the Coinbase listing in April was a victory for the entire digital asset market, legitimised the industry and bought sustained attention and capital to companies and protocols building on blockchain technology. The firm posted its shares on the Nasdaq via a direct listing valuing the company at a whopping $85.8 billion. The valuation was higher than that of traditional stock exchanges such as Hong Kong Exchanges and Clearing ($75.3bn) and ICE, including NYSE Group, ($66.51bn).
2. NFT Mania. Non-Fungible Tokens, which enable ownership of digital assets, exploded into the public consciousness this summer after Beeple sold a piece of digital art named Everydays: The First 5000 Days for $69 million. The term was named “Word of the Year” by Collins Dictionary and saw artists, celebrities, major brands and almost everyone else piling in on the action. Trading in NFTs reached a dizzying $22bn in 2021, compared with just $100m in 2020.
3. Inflation Infamy. Bitcoin’s bullish case continued to strengthen as fears about inflation and traditional currency debasement were major drivers of the 2021 crypto rally. Global inflation soared to its highest levels since 1982 and caused an uptick in the price of energy, shelter, food and other consumer goods. It looks like inflation is not going to disappear any time soon and that “transitory” is dead and buried. It is only a matter of time until we see if Bitcoin’s “digital gold” hypothesis and potential as a store of value is recognised.
4. The Great Miner Exodus. China went full ham and outright banned crypto mining, broking, exchanges and access to traditional financial services for all crypto firms. The move saw miners uproot and move to “The West” with Kazakhstan, Russia, Canada and USA receiving the majority of the digital expatriates. Chinese miners previously accounted for 75% of the world’s Bitcoin hash rate — the total computational power used to mine and process crypto transactions. Did China hand over an enormous stake in one of the most valuable technologies to emerge in the last half century to The West? The miner migration will be positive for Bitcoin’s continuing decentralisation and it will undoubtedly become more resilient if its network is less centralised in one country.
5. To the Moon. Retail traders banded together on a large scale to influence the price of meme-coins and stocks. GameStop received significant media attention in February as the company’s stock price skyrocketed due to a short squeeze orchestrated by users of the Internet forum r/wallstreetbets. Similar tactics were employed in cryptoland where DogeCoin and ShibaInu became household names and created many overnight millionaires and billionaires. Influential people with masses of twitter followers such as Elon Musk and Jack Dorsey kept the crypto party going. Musk even suggested that dogecoin might be “the future currency of earth.” The lesson of this bizarre stretch of crypto history is that social media was, and still is, a force that’s impossible to ignore.
6. Enter the Metaverse. Everybody is now talking about the “Metaverse”. Leaders in technology, entertainment and fashion have rushed to stake their claim in it. Facebook rebranded as ‘Meta’ in November and firms like Nike, Baidu, Microsoft and many others also jumped on the bandwagon. Metaverse and gaming tokens such as Axie Infinity, Sandbox and Decentraland rose to fame with eye watering returns. Although few seem to agree about what exactly it is, the important thing is that it’s coming. Much of the metaverse, the hypothesised next iteration of the internet (or Web 3.0), is underpinned by crypto and NFT technology.
7. Adventure Capital. Venture capitalists bet big on crypto start-ups in 2021, investing more than $27 billion globally this year, more than the previous 10 years combined. Many of these investments were made by the venture capital arms of crypto companies such as Coinbase (which made more deals than any venture capital firm). Other VC’s have also made enormous bets that blockchain will be as big as the internet. Andreessen Horowitz launched a $2.2bn fund in June, and Paradigm launched a $2.5bn fund in November. The sheer size of these funds is reflective of crypto being the most exciting frontier in technology for a generation.
8. Government Oversight. Regulators and governments narrowed their focus on the digital asset industry following its rapid ascent. Watchdogs came after retail exchanges like Binance, Joe Biden squeezed a controversial crypto tax reporting requirement into his infrastructure bill, and Gary Gensler began sharpening his blade. Incoming regulation isn’t great in the short term as it creates uncertainty and leads to volatility. But be in no doubt — this is certainly long term a good thing. It means crypto is now too big to ignore. Once the asset class is properly regulated the world’s biggest institutions can partake. Think pension funds, insurers, sovereign wealth, BlackRock et al. This will have a huge impact on the price. Besides, this has happened time and time again throughout history. The private sector always leads with innovation then governments attempt to oversee it. Crypto is no different.
9. Institutional Adoption. The world’s largest bank, JPMorgan, hit the headlines in July announcing it will provide all wealth-management clients with access to five crypto funds. Other banks such as Goldman Sachs and DBS followed. Although their offerings are limited this is a major step in the right direction and we expect to see other banks and wealth managers join JPM soon in offering crypto products to their clients as rich individuals are increasingly looking to make bets on crypto.
10. Bitcoin ETFs. The explosive debut of the ProShares ETF (BITO) in October saw more than $1.2bn of inflows into the product in its first week, the fastest any ETF has ever hit the $1bn mark, highlighting the extreme levels of pent up demand for digital assets amongst institutions. All the BTC ETFs to emerge so far are futures based and none hold the actual asset.
11. Real Money. El Salvador took a giant step by becoming the first country to adopt Bitcoin as legal tender, allowing residents to pay all public and private debts in the cryptocurrency. Goods, services and even taxes can now be paid in the country using the world’s oldest crypto. More people in the country now have a Bitcoin wallet than a bank account. The move has improved Salvadoran’s access to financial services and reduces the nation’s dependence on the US economic regime. Will more countries follow next year?
12. ETH Killers. Alternatives to Ethereum emerged as major rivals to the major smart contract protocol, each promising to improve on the cryptocurrencies legacy issues such as slow speed, high gas fees and scalability. Solana shot up the charts to be the fifth-largest crypto with a market cap of $56 billion, and rising over 12,000% since the start of the year. Polkadot, Cardano, Avalanche and several others also vied for ETHs crown, with varying success. Compared with ETH, these adversaries are still relatively young and still need to be tested. It’s also worth noting that many of these issues, such as congestion, are actually testament to Ethereum’s success as a network. The Ethereum London Hard Fork in August was a major feather in cryptos cap and showed that massive decentralised networks with millions of users can be upgraded. This will be one of the most important stories to keep an eye on if your investment horizon for crypto is longer than 6 days or 6 months.

Naughty or Nice

If 2022 turns out to be anything like 2021 we are truly in for something special. The current pace of innovation in crypto is something the world has never seen before in its history. 2022 will be another seminal year for the sector and a number of key developments are anticipated — many positive tailwinds, but also a number of major obstacles. Making predictions can be a fool’s game — especially in this fast-moving sector where wild swan events are common. But here we go anyway.

• Central Bank Digital Currencies (CBDCs) will be one of the biggest themes next year. The Chinese government will likely be the first major economy to announce a digital currency with its e-renminbi, rumored to be rolled-out at the Winter Olympics. Other advanced economies such as the UK and Japan are also developing their own versions. Questions remain over the control and use of consumers payment data by governments.
• Increasing evidence points to a Bitcoin Spot ETF being approved in 2022. The market is now large and mature enough to support one and the current assembly of futures ETFs are widely regarded as not very retail-friendly given the high costs involved of rolling over contracts. This will be another major step towards crypto becoming a conventional asset.
• Investors will rotate into DeFi. Decentralised finance and decentralised autonomous organizations (DAOs) are likely to be the highest growth areas of crypto next year. The total money deposited into DeFi services surpassed $200 billion for the first time this year — we expect this to grow further in 2022.
• The recent run of ultra-easy policy is coming to a close and this could have an impact on the price of risk assets such as crypto. The Fed recently signal three rate hikes in 2022, will terminate its asset purchase program in March, and the ECB and BoE will likely follow. Animal spirits will take a knock when rates rise, and money printing and asset purchasing are wound down.
• Governments will continue to flex their muscles and regulation will be a key issue in 2022. More scrutiny is coming to the stablecoin sector as regulators look under the hood on the soundness of the underlying collateral and amount of leverage deployed. DeFi will fall under the gaze of centralised authorities. XRP will also be front and center as Ripple locks horns with the SEC in a battler over whether it should be classed as a security. Tax authorities will also begin to dig their claws into the asset class.
• Ethereum will upgrade to its much anticipated “2.0” version and move to a proof-of-stake (PoS) consensus mechanism which should increase the speed of the clogged network and reduce gas fees. This evolution will be essential to fend off upstart rivals such as Solana, Polkadot and Cardano. The majority of DeFi projects and NFT activity happens on ETH. They will move elsewhere if the rollout is delayed or is not a success.

Regardless if crypto has been naughty or nice in 2021, we’ve all received a gift. The journey is just beginning and 2022 promises to be another action packed adventure.

Happy Holidays from Q9

Q9 Capital: www.q9capital.com