Will 2022 be a weak year for cryptocurrencies?

Bitcoin has achieved huge gains throughout its life cycle, which also shows that it is extremely attractive to early investors. Even though it has risen to tens of thousands of dollars, its charm seems to remain undiminished, and it has set new highs twice in 2021. However, since the beginning of this year, the overall trend of Bitcoin has been downward. It has caused speculation that after the huge gains, the crypto market will usher in a weak year?

Although Bitcoin is currently falling after hitting an all-time high at the end of 2021, it is certain that no one can predict the price trend of cryptocurrencies. However, in the long run, the crypto market is gaining wider attention.

Technology and attention are rising widely

A report released by Wells Fargo Investment Institute emphasized that the technology behind cryptocurrencies is following an adoption path similar to that of the internet in the early to mid-1990s, when "consumers still needed time to figure out what the technology was, what it could do, and how it could benefit them." However, like the internet, the increase in the number of crypto users shows that "the world is beginning to embrace the technology - and quickly." The report stated: "If this trend continues, cryptocurrencies may soon exit the early adoption phase and enter a super adoption tipping point, just like other technologies. At some point, adoption begins to rise and does not go back... Leaving aside the precise numbers, there is no doubt that global cryptocurrency adoption is on the rise and may soon reach a super tipping point." Wells Fargo also stated that the global use of cryptocurrencies is rising and may achieve explosive growth.

It is worth mentioning that cryptocurrencies are increasingly favored by countries without bank account options. In August 2021, the World Bank reported that nearly half of the population in Latin America and the Caribbean (LAC) is unbanked, meaning they do not have access to a bank account or other financial services. These unbanked people cite the cost of maintaining an account, distance from financial institutions, lack of necessary documents, and lack of trust as the most common reasons for not having a bank account. Being unbanked presents significant challenges, making it difficult for individuals to safely receive payments, save money, transfer funds outside of their community, or obtain credit and credit ratings. In short, being unbanked can make it nearly impossible for individuals to conduct everyday financial transactions that many of us take for granted. Cryptocurrency is changing this by helping individuals access online financial services such as savings apps, lending platforms, and even micro-insurance solutions through their mobile devices with far fewer barriers. And at lower fees than traditional financial institutions. It is these three characteristics of cryptocurrency - accessibility, affordability, and anonymity - that make Bitcoin an attractive banking option for the unbanked in countries like El Salvador.

In addition, the HoFT Foundation and PwC Luxembourg, with the active support of the Luxembourg Association of the Fund Industry (ALFI), published a comprehensive market study on the Luxembourg cryptoasset industry. The report shows that 2021 has been an outstanding year for cryptoassets. Bitcoin reached a historic market capitalization threshold, the NFT market developed rapidly, and Bitcoin was adopted as legal tender by a sovereign state for the first time. In the financial services sector in Luxembourg, enthusiasm and pragmatism coexist around cryptoassets: 61% of our respondents are already evaluating, developing or providing cryptoasset products/services.

Thomas Campione, blockchain and crypto asset leader at PwC Luxembourg, said: "While the markets have been turbulent over the past two months, I expect 2022 to be a key year for the crypto asset management industry, judging by the global situation and the structural development of the industry. It is vital that Luxembourg and the wider financial industry embrace this topic and not distance themselves from it because of conflicting signals."

Rate hikes could trigger turmoil

Over the past period of time, as the crypto market has come into people's view more widely, its relationship with the macro economy has become increasingly close.

Data shows that since the beginning of 2020, Bitcoin prices have become more sensitive to interest rates. According to an analysis released by the International Monetary Fund (IMF), the correlation coefficient between Bitcoin and the S&P 500 index was 0.01 from 2017 to 2019. Refinitiv data shows that since the beginning of 2020, the fluctuations of the two have been positively correlated, and their correlation coefficient has risen from 0.1 in September 2021 to the current 0.41. It is reported that for this coefficient, 0 means no correlation, and 1 means that the fluctuations of the two are completely synchronized.

Given the popularity of crypto investments and their correlation with the macro economy and stocks, several institutions have stated that Bitcoin is no longer marginal. In December 2020, Weiss Crypto Ratings, a cryptocurrency rating agency, tweeted that cryptocurrencies will no longer be marginal currencies. They will become finance suitable for ordinary people. Just like the passage of time, this is inevitable and unstoppable.

The IMF further pointed out in its latest report that stronger correlations indicate that Bitcoin has always been a risky asset. Its correlation with stocks is already higher than the correlation between stocks and other assets such as gold, investment-grade bonds and major currencies, indicating that risk diversification benefits are limited compared to initial expectations. The increased and considerable co-movement and spillover between the cryptocurrency market and the stock market indicate that the two asset classes are increasingly interconnected, which makes it possible to transmit shocks that could undermine the stability of financial markets. The IMF analyzed that crypto assets are no longer on the edge of the financial system. Given their relatively high volatility and valuations, their increased co-movement may soon pose a risk to financial stability, especially in countries where cryptocurrencies are widely adopted. Therefore, it is time to adopt a comprehensive and coordinated global regulatory framework to guide national supervision and mitigate financial stability risks from the crypto ecosystem.

Since the Federal Reserve has signaled in December that it plans to raise interest rates three times in 2022, the cryptocurrency market should be prepared for a parallel increase in risk aversion. Invesco Chief Global Market Strategist Christina Hooper said that investors should be prepared for volatility in stocks, bonds, and cryptocurrencies in the near term, and that a pullback in technology stocks may bring opportunities if investors have a long enough investment period. In Christina Hooper's view, for any asset class, the market will eventually adapt to the Fed's normalization model because the market has previously experienced volatility caused by the Fed's normalization and has survived it smoothly.

Relying on continuous investment and development by institutions

In fact, in addition to the capital inflow brought by the massive money printing, this round of crypto boom also depends more on the attention of institutions.

At the beginning of 2021, Eric Peters, CEO of One River Asset Management, pointed out that institutional adoption of crypto assets is expanding, and almost all large and reputable institutions in the United States are discussing it. According to CNBC analysis, for several months, as more and more institutional investors have become interested in cryptocurrencies, Bitcoin has been traded like stocks, especially like technology stocks, and some people even trade Bitcoin as a risky asset. Therefore, it can be seen that cryptocurrencies have been rising and selling in sync with technology stocks.

However, recently, Adam Levinson, chief investment officer of hedge fund Graticule Asset Management Asia (GAMA), said that although many traditional institutions have made the decision to allocate cryptocurrencies, most institutions are slow in actual investment. This is because the volatility of growth stocks caused by rising interest rates has temporarily slowed down institutional investors' investment plans in cryptocurrencies.

In the face of the recent volatile downward trend, Warren Buffett, the stock god, said when talking about Bitcoin that if you find yourself on a chronically leaking boat, the energy spent on changing the boat may be more effective than the energy spent on fixing the leak.

Despite the market downturn, veteran investor and fund manager Bill Miller said that Bitcoin is insurance against financial disasters. In addition, on-chain analyst Phyrex tweeted that more BTC is moving towards long-term holding, and more and more holders choose to hold for the long term, which is a signal that the circulation of BTC will become lower and lower.