Five cryptocurrency trends for 2022

2021 has been an exciting time for the global cryptocurrency market and the blockchain ecosystem: capitalisation smashed all previous records nearing $3 trillion (£2.2 trillion), dramatic price surge, El Salvador became the first country to adopt Bitcoin as legal tender, Coinbase IPO, ProShares Bitcoin ETFs.

The top performers were Gala (up over 40,000%), Axie Infinity (AXS, up over 15,000%), XYO (XYO, up over 15,900%), Terra (LUNA, up over 11,000%), Ecomi (OMI, up over  16,000%), Solana (SOL, up over 9,000%), Polygon (MATIC, up over 11,500%). On the other hand, there were also big losers, among them Internet Computer (ICP) which performed at -96%.

So, what can we expect for 2022? Here are a few predictions:

1. Bitcoin remains the “King”.

Even though Bitcoin dominance decreased in 2021 by about 20%, and investors began to eye alternatives such as Ethereum, Solana and Polkadot, BTC remains the main “heavy” crypto asset. Bitcoin dominance is calculated as the ratio of BTC’s market capitalisation and the total crypto market cap. Altcoin dominance increased from around 30% to 60% between January 2011 and January 2022. Layer-1 networks like Solana, Avalanche, and Terra, etc. began to be looked upon as alternatives to Ethereum.

At the same time, long-term holding in Bitcoin increased by approximately 16% over 2021, while short-term holding supply declined by around 32%. This resulted in the so called “Sovereign Supply” (total supply not on exchanges) increasing to an all-time-high of around 13M BTC. This “macro consolidation” has increased optimism in the Bitcoin.

As a result of many factors, including the one mentioned above, the demand for BTC and its derivatives is expected to rise in 2022. Numbers indicate that total open interest in BTC futures has almost doubled in 2021, rising by nearly 97%. Overall, we can observe lower trading volumes and rising open interest that might indicate the possibility of a localised leverage squeeze during the beginning of 2022. This can imply that when the BTC price changes too quickly, trading positions of leveraged traders are liquidated as prices move against them.

Banking in Bitcoin is expected to grow this year as well. Bitcoin represents an asset that offers the advantage of having neither a counterparty risk, nor a credit risk, rendering it suitable as a collateral. So far, bitcoin dominates as an options market collateral. The bitcoin lending market will be growing too. As of now, BTC has a lower rate of collateralisation, implying underleveraging, showing a potential for being used as a DeFi collateral. Bitcoin holders will be able to use more of their bitcoins for borrowing, lending, provisioning liquidity and so on. More companies like Genesis that have demonstrated a YoY growth of 245% in their outstanding loans, will enter this market.

More of the bitcoin supply will be wrapped on other blockchains. Wrapped bitcoin is a tokenised representation of bitcoin. So far, there are several wrapped bitcoins, e.g., Wrapped bitcoin (wBTC or WBTC), Huobi BTC (hBTC), renBTC, Synthetix’s sBTC, Tokenlon’s imBTC, pNetwork’s pBTC etc. ACoconut’s acBTC, PieDAO’s BTC++ and mStable’s mBTC, that are all backed by multiple wrapped versions of bitcoin. The main advantage of wrapped bitcoins is their integration into other blockchain networks, wallets, decentralised applications (dApps), and smart contracts, such as Ethereum. Given that a big part of the DeFi is run on Ethereum, it will decrease “isolation” of bitcoin users. Thus, it positively affects utility and liquidity of smart contract platforms and decentralised finance (DeFi) applications.

1. Cross-blockchain bridges

These connect different blockchains and allow users to send cryptocurrencies from one chain to another. So far, there are about 20 popular bridges.

Cross-blockchain bridge protocols like Rune (THORChain) will facilitate more peer-to-peer swaps. As of now, most bridges connect to the Ethereum (ETH) network due to Ethereum Virtual Machine (EVM) compatibility such as Tezos Wrap Protocol Bridge, Binance Smart Chain Bridge, Solana’s Wormhole Bridge and Avalanche Bridge. Layer-2 scaling solutions like Polygon and Arbitrum have triggered the development of a multichain ecosystem.

Overall, cross-blockchain possibilities are expected to play a more crucial role. Multi-blockchain projects and interoperability will become key components of the DeFi industry.

1. DeFi and liquidity

The mission of DeFi is to provide financial services without centralised intermediaries, through automated/smart protocols on blockchains. It is centred around two main elements: stablecoins and protocols for trading, lending and investing. It has great potential and can also be used to complement traditional finance. In 2021, the DeFi ecosystem grew sevenfold on a year-on-year basis, with a market dominance of about 17% and the number of users using dApps grew by 592%. Inflation Adjusted Total Value Locked of DeFi is around $150 billion. Recently, several promising new protocols have appeared. For instance, OlympusPro, Tokemak for long-term liquidity, and Fei Protocol x Ondo Finance for short-term liquidity. This has opened new doors for further development of DeFi2.

Development of fractional reserve banking and off-chain credit scoring systems will be one of the trends to watch in 2022 as well.

Blockchain games also look prominent as traded volumes across platforms like Axie Infinity, Alien Worlds, Splinterlands and Upland significantly increased. The blockchain gaming industry grew by 765% YoY in 2021 making free-to-play blockchain games a very promising market.

Another fascinating trend is the ongoing transition to Web3, building a potentially new economy and organisational structure.

1. NFTs (non-fungible tokens)

Big corporations have started to look at NFTs. For instance, LVMH’s supply chain and “Louis” game (Gucci & Burberry are following). Collaboration of Microsoft and ConsenSys resulted in a NFT Aura platform. IPwe and IBM have introduced a pattern market based on NFTs. Media Publishares (publishers of Vogue, Esquire, Robb Report and Buro in Singapore) and blockchain company Vidy launched the NFT platform to trade digital fashion, art and music.  Digital collectibles based on NFTs are being launched as well (Tencent Music, Tidal,  NBA & WNBA etc.). Executives’ attention to NFTs is rising. Overall, digital art is leading this adoption, followed by others such as CPG, and some other luxury brands. Data indicates that decentralised commerce may be the next step in NFTs for brands and retailers.

Overall, NFT potential is huge, given that they can be used to transfer rights related to both virtual and physical property. Thus, we expect interest in how NFTs can be treated, held and valued from traditional institutions like museums, funds etc. But the application of NFTs goes far beyond this. For instance, selectively sharing pieces of our personal identity or leveraging NFTs as access tokens. Only time will tell.

1. Regulation

As the cryptocurrency market grows too big to ignore more and more institutional investors have begun to recognise this asset class as a legitimate investment option, although full-fledged regulation is still some way off. Macro-economic “adoption” of blockchain/digital money is expected to intensify. We can expect a more sharpened focus on CBDCs and stablecoins that can result in diversification and lower transactions costs, reduce cross-border frictions, complement deposits, increase financial inclusion etc. We can also expect that a bank-like regulatory set-up for stablecoin issuers will be proposed in 2022.  

So, overall, we can expect to see a broader adoption of blockchain technologies, to digitise, track and monitor many more processes starting with medical data usage, ESG (environmental, social and corporate governance) attributes, verifying suppliers’ identities, money transfer and so on. The sky is the limit for the use of this technology.