2021 could be summed up as one where crypto finally went mainstream, after years of being consigned largely to the realms of geeks. It was hard to miss mentions of NFTs, meme coins and the metaverse, which dominated the headlines, while the venerable Bitcoin made history with its debut as a fund and fiat currency.
If the past is any indication of the future, we’re in for another eventful year. Given the current market climate, we know we’re in for some volatility, at least in the near term. But in which direction will the major developments of last year swing as the blockchain industry navigates a new year of challenges and opportunities?
Let’s take a deeper dive into some of the biggest developments that shaped 2021 and explore what may come next as the year unravels.
1. The first US Bitcoin futures ETF launched in 2021. Could spot ETFs be next?
The first US Bitcoin ETF, the ProShares Bitcoin Strategy, started trading on the New York Stock Exchange in October. While it is based on Bitcoin forward contracts, it remains a watershed for the crypto industry in marking the formal recognition of Bitcoin as a mature financial asset under the current regulatory regime. It also put Bitcoin on the radar of retail investors, who now have more than a dozen crypto funds to choose from.
What’s next? It’s likely that you’ll start to see more players entering the field and starting to compete on price, like traditional passively managed ETFs. Right now the Proshares ETF is charging 0.95% fees, but competitors can easily launch similar products. Traditional stock ETFs right now charge much lower fees, with Vanguard charging an average of 0.08%. This means institutional investors could gain exposure to cryptocurrencies at ultra-low costs in the future.
Could Bitcoin spot ETFs be approved in 2022? Futures and spot markets are inherently linked with each other, and data from the Proshares futures ETF and others can provide indications that make it easier for the SEC to approve spot ETFs in the future. Once it is evident that roll yields have a significant impact on performance, then the SEC may be likely to prefer spot ETFs. At the same time, SEC Chairman Gary Gensler has remained adamant in his rejection of all spot Bitcoin ETF applications, as analysts reason that a decentralized cryptocurrency such as Bitcoin could never be sufficiently regulated by a central authority such as the SEC.
2. 2021 saw the rise of DOGE and other meme coins. Do meme coins have a future?
2021 may also go down in history as the year of the meme coin, referring to cryptocurrencies based on popular jokes, buzzwords or imagery on the Internet. The most well-known meme coin Dogecoin was created as a spoof of Bitcoin, but quickly soared in value not least due to Tesla CEO Elon Musk whose endorsement came in the form of multiple tweets.
Since then, Dogecoin’s price has skyrocketed over 156 times and it became the fourth most searched term on Google in 2021. The meteoric success of Dogecoin was swiftly followed by a menagerie of meme coins inspired by man’s best friend and other animals: Shiba Inu, Akita, Samoyed, Siberian Husky etc.
Will meme coins last? Many have criticized meme coins for lacking concrete operating mechanisms and business models, and the recent market rout indicates that their run may be coming to an end. Note that 97% of meme coin market cap comes from Shiba Inu and Dogecoin.
But what meme coins do have is community. Meme coins represent the rise of a counter-elite culture, or grassroots culture. Whether it be governments or corporations, the world has always been perceived as controlled by the elite, with everyday citizens playing a trivial role in how things are run. Blockchain was born with the idea of decentralization, but even it is dominated by the elite – most of the people in Bitcon’s e-mail group are cryptography experts, and Vitalik started programming under the tutelage of his father, a computer scientist.
Meme coins may survive for the very reasons that fuel Wall Street Bets: strong communities dedicated to defying the elite, and this phenomenon looks like it’s here to stay.
3. Central banks advanced support for CBDCs; we expect more countries to do so in 2022
Central Bank Digital Currencies (CBDCs), which are essential digital money backed by a central bank, received a boost when the G7 bloc expressed an interest in cooperating closely on this front at its communique last June. In August, the Bank for International Settlements, International Monetary Fund and World Bank also appealed to central banks to collaborate in the development of CBDC. Among major economies, China has taken the lead with its e-CNY trial, which has completed transactions totaling 56 billion yuan across 123 million accounts – not surprising for a country where most consumers are already using digital wallets to pay for everyday purchases.
What’s in store for 2022? Expect at least a few countries to start introducing CBDCs to reduce paperwork, disburse welfare payments, and distribute government worker salaries, to mention a few. South Korea has already completed the first phase of its testing program, exploring basic functions such as manufacturing, issuing and distribution of money in a simulated environment. While Singapore is also reporting progress with its testing programs, its central bank claims that the country is not in a rush, given that most people in the country already have bank accounts.
We expect more countries in developing markets, such as Nigeria, to benefit from the adoption of CBDCs. These countries have a higher need for CBDCs to increase remittances, foster cross-border trade, improve financial inclusion, and enable the government to send direct welfare payments to citizens. Also expect pariah countries such as Iran to start piloting CBDCs to break the US dollar’s hold over them.
4. Ethereum started its “Burn and Destroy” Era; we expect layer 2 rollups to continue to dominate
The EIP-1559 technical upgrade of Ethereum last August, known as “London Hard Fork”, drew significant attention to two key changes. These were centered on reforming the gas auction scheme to reduce transaction fees on the Ethereum blockchain, and introducing a block easing scheme to keep fees more stable.
Under this upgrade, part of the income miners earn would be “burnt” or permanently destroyed. According to Glassnode, after EIP-1559 went into effect, transaction costs did not decrease by a large margin when converted to Ether. In fact, considering the appreciation of the token, the transaction fees and mining revenue actually increased in dollar value.
And yet many say that Ethereum still has a long way to go to solve its congestion issues. Some say that the long-awaited upgrade to Ethereum 2.0, in which it will transition from a proof-of-work consensus mechanism to a proof-of-stake one may come at increased security risks, as competitor chains such as Solana have went offline several times this year. Others say that sharding, a key stage in the upgrade, won’t actually happen until 2023, giving its competitors more than enough time to catch up and sideline Ethereum as the king of DeFi transactions.
For the time being, however, layer 2 roll-up scaling solutions will continue to give Ethereum users a better experience, while holding their own against the new public chains. According to Vitalik, rollups remain the only trustless scaling solution for Ethereum, and could very well start to serve other new public chains in 2022.
5. 2021 saw the rise of blockchain games; expect guilds to play a key role in 2022
Blockchain gaming had a banner year in 2021, raising over $3.7 billion from investment funds with Axie Infinity becoming the standout on the gaming scene. The appeal of the popular blockchain game cuts across demographics, underpinning its “play to earn” business model where players earn profits from selling game tokens. The number of game-related unique active wallets accounted for more than half of all decentralized applications as of last October, underscoring the potential of blockchain gaming.
In our view, 2022 will be the year of guilds, who enable more players to participate in play-to-earn gaming without putting up initial capital, which is getting more costly. Such guilds lend P2E equipment to new players for a fee while they level up and make money from rewards. Such lending models are important in emerging markets such as Vietnam, where the gaming population skews young and the average monthly incomes may be much lower than that of users from more developed economies.
As impactful as 2021 was for the blockchain industry, 2022 will be an even more pivotal year as the industry looks to convert the mainstream attention it garnered in 2021 into mainstream adoption. The developments highlighted above are only a handful of examples of where this space could be headed. For those who are interested, more details can be found in Huobi’s Global Blockchain Industry Overview and Trends 2021-2022 Annual Report.
Director, Huobi Research Institute