Cryptocurrency may be down, but it's definitely not out: follow the money!
2021 was quite a remarkable year for cryptocurrency space. Bitcoin hit a high price of $69,000, the overall cryptocurrency market grew at it's peak to almost 3 trillion dollars and the appetite for investments in blockchain and crypto-based ventures, both in quantity and dollar value, grew significantly. However as we progress into 2022 market sentiment has changed. With prices moving on a more bearish rather then bullish trajectory and with the euphoric sentiment having turned somewhat tepid, although cryptocurrency maybe down it is definitely not out and in this article I will explain why you should be hugely optimistic for this space in the future.
With a projected global market size of almost 5 trillion dollars by 2030, growing at a annual rate of almost 13% up to 2030, crypto is undoubtedly proving itself to be more than just a passing fad.
2018 was without question a pivotal year for the growth of cryptocurrency. Investment in crypto-based projects started to gain traction and massive Venture Capital (VC) firms focused solely on blockchain emerged and it was thought that 2019 would be the breakthrough year for crypto mass adoption.
Although the industry saw a period of slower investments in the two years following the peak of the 2018 bull market, the noticeable dip could be attributed to several factors, including the changing and fickle nature of interest, the emergence of newer concepts, and the seemingly inconsistency in the value of Bitcoin as well as other altcoins.
"Relative market size doesn't matter; what matters is the absolute size of the 'currency area,' or the set of goods and services that can be purchased with the currency." - Vili Lehdonvirta, Associate Professor and Senior Research Fellow at the University of Oxford commenting on how to spot mass adoption
2021 saw an extremely positive shift in the perception by institutional payers towards cryptocurrency investments. Wall Street for so long had shunned anything to do with crypto assets seemed to do a complete 180 degree turn and started to talk favourably about the sector. During the year saw the cryptocurrency exchange Crypto.com buying the naming rights to the Staples Center sports arena 22 years after it was first built. Major retail brands as well as a host of international celebrities began to embrace NFTs. Even though most billion dollar hedge funds are still hesitant to get too involved, primarily due to uncertainties surrounding regulations, more and more institutions are seeking digital asset exposure for their clients and this was highlighted in an annual crypto report written by the audit firm PWC.
Growing crypto interest
Where people are able to enter a space that is still relatively new early adopters are presented with unique opportunities to achieve exponential, asymmetric growth on their investments. Many banks and financial institutions have shown a growing interest in crypto as an asset class to either add to their balance sheets or offer to their clients in different forms. And in a space with such an array of businesses and projects what invariably starts as a small investment often grows into a significant portion of either an individual's or companies net worth.
In the world of business there is an appetite to constantly seek out ways to achieve both operational efficiency as well as transparency in financial payment systems. The transition to both digital currency and blockchain technology would appear to be the perfect solution to these problems. Moving away from legacy systems to the world of virtual currency also adds benefit to the data security issues and the increasing demand for remittances in developing nations. This is a primary reason why crypto projects were able to successfully court a record amount of investment in 2021.
Financial transparency excites VC firms
Secure and transparent data transfers via blockchain based solutions introduces two areas that excites VC investors. Firstly, it is difficult for any venture that is looking to raise capital to lie to early investors about cash flow or move money in nefarious ways - every transaction is clearly recorded on the blockchain for everyone who knows how to find it.
Secondly, besides the yield that is possible that makes traditional bankers want to start their own funds and firms (Business 2 Consumer), blockchain also enables many enterprise-level IT solutions (Business 2 Business). Most people will however explore the crypto space and blockchain through play-to earn platforms, NFTs, Bitcoin, or simply from buying at the top of a market cycle. Many institutions and small to medium sized enterprises will discover blockchain through payment networks, database management systems, VC activity, and portfolio diversification.
Emerging economies pushing investment firms to fund crypto-based solutions
It has started to be acknowledged that there is massive untapped potential within emerging economies that will acts as an additional catalyst for cryptocurrency adoption. El Salvador for example has been a beacon of light in this regard by choosing to adopt Btcoin as legal tender in 2021, much to the dismay of the IMF.
Audit firm Deloitte recently stated that 82% of Indians surveyed plan to invest in Bitcoin and crypto. That alone could represent an extra 15% of the world's population investing in crypto. As such developing economies are seen as having huge potential for accessible financial services and payments, which will only further add to the growth of crypto overall.
Sandy Carter who was the Vice President of Amazon's cloud computing division, left her position to work with Unstoppable Domains a company looking to offer a solution to replace cryptocurrency addresses with a human readable name. After sharing other open positions with Unstoppable Domains on LinkedIn, around 350 people from some of the biggest internet companies applied with her.
Tech execs leave Silicon Valley for Blockchain
Tech companies such as Google, Amazon, and Apple pay executives millions of dollars a year. Google has even offered an incentive of additional shares to the employees who are seen as most ripe for poaching. Never the less, the forward thinkers within these organisations are actually showing a preference to pursue what they perceive to be a once in a lifetime opportunity.
Crypto poised for more investments
Businesses across multiple industry sectors are embracing Bitcoin and blockchain based payment solutions. These range from tech companies to airlines - from financial institutions to retail giants. These businesses are internally motivated to switch to payments in virtual currencies, forcing users to make the switch. Recent startups like Bitpay and BlockFi have introduced tools in the growing decentralised finance sector to aid crypto based transactions. The crypto market will gain traction and draw new investments as enterprise-level utility gains wider adoption.
Growing focus on NFTs
Over the past year or so NFTs have seen a growth in popularity from wide variety of investors. NFTs are still nascent with respect to the potential uses for the ERC-721 token. While the idea of global, immutable ownership of these tokens opens many doors for financial vehicles like trusts and wills, but, for now they’re focus is mainly on digital art and video game assets. Marketplaces for digital assets are growing at an impressive rate and will continue to attract interest from venture capitalists in the years ahead.
There is without question a lot more opportunity for the creative application of NFTs in art, equities, finance, gaming, and many other corners of society that don't yet make sense in today's context. The brilliant minds in the industry are developing increasingly creative ways to leverage the technology in ways investors can’t even imagine.
The rise of VC DAOs
It is anticipated that VC DAOs (Decentralized Autonomous Organisations) will lead to a new wave of investment opportunities as some of their features make them suitable for investing and fundraising.
A DOA is essentially an organisation which is represented by rules that are encoded as a computer program that is transparent, controlled by the organisation members and not influenced by a central government. The financial transaction record and program rules of a DOA are maintained on a blockchain.
Some of the more mundane formalities that often burden traditional VCs have the potential to be negated by a VC DAO, whilst at the same time increasing awareness amongst investors, users and developers. The network effect plays a pivotal role here. However, for now conventional VCs are still better positioned due to regulatory and legal clarity.
There is a growing trend of tokenising VC funds. It's similar to equity crowdfunding, which has been thriving since the sectoral deregulation occurring from the 2012 US Jobs Act and similar legislation globally. Tokenising a VC fund offers the ability to create vital liquidity with the underlying investment. Moreover, this move opens a fund's capital to retail investors by democratising access to that asset class. Overall, it provides enhanced funding opportunities for upcoming VCs.
VCs exiting with tokens
The exit strategy is naturally important for any VC. Historically they have utilised three main exit strategies: management buyout, mergers and acquisitions (M&A), and an IPO. However, blockchain VCs now see huge benefits with investing in a startup companies digital token. The divestment process becomes a lot easier this way, allowing investors to better position their exits.
Regulatory hurdles and time-consuming due diligence undertakings in the case of IPOs can make exiting a burdensome experience. Typically, regulators and authorities often get caught up in enhanced scrutiny when it comes to the IPO of blockchain based firms.
2021 also saw another major shift in the industry which is expected to further pull consumers towards virtual currencies. Experts were expecting a peak in users over the course of the last year, and while the growth has been impressive, it actually doesn't look like it has peaked.
One reason crypto has seen such popularity is the industry's readiness to embrace blockchain as a technological innovation and ideological revolution. Furthermore business' and consumers' willingness to adopt virtual technology as the face of the future have undoubtedly played a role in blockchain's expansion and this is only going to gain momentum in the years ahead.