Tuesday, January 25 2022

This article was written exclusively for Investing.com

  • Substantial increase in market capitalization of cryptocurrencies in 2021
  • Acceleration of market acceptance
  • Speculative frenzy continues to push prices up
  • Regulators eyeing booming asset class
  • Control of the money supply is a critical factor for governments; the higher the market capitalization, the greater the concerns

and are the two main cryptocurrencies. At the end of 2021, they represented more than 60% of the overall market capitalization of the asset class. At the $ 47,000 level, Bitcoin’s value was almost $ 894 billion. At $ 3,715 per token, Ethereum’s market cap was almost $ 445 billion.

Together, at the end of the year, the two accounted for nearly $ 1.34 trillion of the burgeoning asset class’s $ 2.223 trillion worth.

Meanwhile, Apple (NASDAQ :), the world’s largest company at the end of 2021, had a market valuation of $ 2.913 trillion at $ 177.57 per share on December 31, 2021. The entire The cryptocurrency asset class was still below the value of the main publicly traded company, but it was biting its heels.

As we head into 2022, further growth in the digital currency asset class is likely to heighten concerns from governments around the world about “”systemic risks“Created by cryptos. However, the main concern remains the control of the money supply, as the asset class poses a growing threat to fiat currencies.

Substantial increase in market capitalization of cryptocurrencies in 2021

According to CoinMarketCap, at the end of 2020 the market capitalization of the cryptocurrency asset class was $ 767.482 billion. As of December 31, 2021, it exceeded $ 2.223 trillion, with the value increasing almost 2.9 times.

Bitcoin, the leader in the asset class, posted an impressive gain for the year, but closed well below the all-time high on November 10.

Source: bar chart

The graph highlights the increase from $ 28,986.74 on December 31, 2020 to $ 46,329.11 at the end of 2021, an increase of 59.83%. However, Bitcoin closed 32.77% lower from its all-time high on November 10 of $ 68,906.48.

Ethereum, meanwhile, did even better in 2021.

ETH / USD monthly

Source: bar chart

Ethereum fell from $ 738,912 at the end of 2020 to $ 3,688,877 on December 31, 2021. The second crypto has risen nearly five times. Bitcoin underperformed the overall asset class in 2021, while Ethereum outperformed.

Bitcoin is a medium of exchange, while Ethereum’s protocol is a platform for many of the more than 16,200 tokens. Ethereum is faster, more efficient, and with its next version, Ethereum 2.0 will be a greener crypto because it requires much less energy to mine through the proof of stake mechanism.

Acceleration of market acceptance

Growth in the asset class reflects a rejection of fiat currencies in a year in which inflation has gripped the markets, eroding the value of the US dollar, euro, pound sterling , the yen, and most other fiat media. Cryptocurrency values ​​are a function of pure supply and demand without any government intervention.

As the speculative frenzy created by the bullish price action pushed cryptos higher, the growing comfort with tokens as an acceptable payment for goods and services has played a role in the growth.

Support from Block (NYSE 🙂 CEO Jack Dorsey and Tesla (NASDAQ 🙂 Founder and CEO Elon Musk were factors that contributed to the gains. At the end of 2021, a growing number of companies are accepting crypto as a form of payment, with many companies holding reserves of major tokens and more and more investors allocating a percentage of crypto wallets, which have become a hedge against it. inflation.

Speculative frenzy continues to push prices up

Nothing drives a market up like an uptrend. Bitcoin’s rise from five cents in 2010 to nearly $ 47,000 at the end of 2021 means that an investment of $ 100 eleven years ago was worth $ 94 million as of December 31, 2021.

Incredible returns have prompted speculators to flock to the volatile crypto asset class. If the trend continues into 2022 and beyond, the appetite of speculators will only increase. Bull markets tend to feed on themselves because the potential for wealth is a magnetic force.

Regulators eyeing booming asset class

In finance, systemic risk is the danger of the collapse of an entire financial system or a total market, as opposed to the risk associated with a single entity, group or component of a system. A single disintegration or collapse could be contained in the network without harming the whole system.

At the end of 2021, at the $ 2.223 billion level, the total value of cryptocurrencies was still below the market capitalization of the world’s largest company, Apple, posing little systemic risk to the financial system. Although the volatile crypto asset class carries many risks, its collapse would not cause economic calamity at the current level.

Meanwhile, if the asset class maintains the same growth rate as in 2021, that could be a different story. If market capitalization grows at the same or a similar rate – to reach $ 6.447 billion by the end of 2022 – regulators are likely to take steps to control the systemic risks of a sudden collapse.

Control of the money supply is a critical factor for governments; the higher the market capitalization, the greater the concerns

While government officials around the world will cite systemic risks as the reason to put the brakes on cryptocurrencies if market capitalization continues to rise, another much bigger issue will spur them to act.

Governments derive their power from their military and the control of the purse strings. The expansion or contraction of the money supply gives an important power because it allows an economic stimulus or contraction. Growing market capitalization for cryptocurrencies comes at the expense of fiat currencies which derive their value from the full faith and credit of governments that issue legal tender.

The bottom line: Cryptos are growing at the expense of fiat currencies. Governments are unlikely to cede any of their instruments of power to individuals. At the same time, the ideological followers of crypto have precisely this intention.

The more the market capitalization of the crypto increases; the more likely governments are to intervene to control what they likely see as an economic enemy that threatens their power and control. In 2021, hedge fund manager Ray Dalio might have put it better when he said about the crypto class:

I think in the end, if it really succeeds, they’ll kill him and they’ll try to kill him. And I think they’re going to kill him because they have ways to kill him.

In 2022, further growth and higher crypto prices could set the stage for an epic battle between the asset class and governments, which could cause a lot of volatility. Only invest capital that you can afford to lose, because fighting governments is a dangerous game.

The market capitalization tipping point could be as low as $ 3 trillion and as high as $ 5,000 billion in 2022. The last thing a government is willing to give up is its power and control over the masses. monetary, making cryptocurrencies a perilous financial arena.

Meanwhile, digital fiat currencies could be the next wave that will become the fintech trade-off. However, ideological differences will continue to draw battle lines as finance evolves over the coming year.

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