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CoinDesk’s 2021 Annual Crypto Review

ValueWalk’s January 2022 Hedge Fund Update: Hedge Funds Suffer in China Campaign

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Welcome to our latest edition of ValueWalk’s hedge fund update. Subscribers below can find an excerpt in the text and the full issue in PDF format. Please send us your feedback! As hedge fund profits soar due to the shipping massacre, China crackdown hedge funds suffer, and investors are returning to hedge funds with earnings soaring. Read more

Highlights

  • As with all financial assets, market performance is usually the first thing that comes to mind when thinking of a “year under review.” Bitcoin (BTC) and Ether (ETH), the two largest cryptocurrencies by market capitalization, have posted gains that far outpace traditional macro assets, gaining 60% and 407%, respectively.
  • While Ethereum, the original asset of the Ethereum blockchain, still has a way to go before traditional investors start shaping their investment thesis, Bitcoin has cemented itself in the minds of all professional investors, as it crossed $1 trillion in market capitalization in 2021.
  • Moreover, Bitcoin also remained uncorrelated with all aggregate assets, which could present an interesting value proposition for the asset as managers look to get closer to building their portfolio in 2022. However, Bitcoin’s correlation with the S&P 500 Index has risen in Q4 2021, which indicates that investors are trading bitcoin and stocks together as risky assets.

Annual Crypto Review

Executive Summary

In the following report, we aim to summarize some of the key topics and metrics that characterize the year’s progress in the cryptocurrency markets.

As with all financial assets, market performance is usually the first thing that comes to mind when thinking of a Year to Compete. Bitcoin (BTC) and Ethher (ETH), the two largest cryptocurrencies, posted gains that far outpace traditional macro assets with 60%, 407%, and 407% gains, respectively. While Ethereum, the original asset of the Ethereum blockchain, still has a way to go before traditional investors start shaping their investment thesis, Bitcoin has cemented itself in the minds of all professional investors, as it crossed $1 trillion market cap in 2021. However, bitcoin also remained uncorrelated to all aggregate assets, which could present an interesting value proposition for the asset as managers look to get closer to building their portfolio in 2022. However, bitcoin’s correlation with the S&P 500 is up in the fourth quarter of 2021, Which suggests that investors are trading bitcoin and stocks together as risk assets.

Outside of market performance, 2021 was a big year from an adoption and technology perspective. In June, El Salvador announced that bitcoin would become legal tender. The announcement came into effect in September when a law came into effect stating that bitcoin must be accepted as a form of payment everywhere in the country. With that came multiple bitcoin purchases by the government, which were executed by the government President’s mobile phone. Meanwhile, Salvadorans who signed up to use Chivo, the country’s official bitcoin wallet, were sent free $30 worth of bitcoin, and committed to using the Lightning Network, the commerce layer of bitcoin, to enable a more frictionless bitcoin economy. The amount of bitcoin committed to the Lightning Network grew incredibly fast in 2021, reviving life in the Bitcoin digital cash case.

2021 also marked the year of a significant technical upgrade of the Bitcoin protocol known as Taproot (read more here). Taproot is a package of three upgrades that improve network security, privacy, and scalability. Taproot is the most significant upgrade to the Bitcoin network since the activation of the Segregated Witness block capacity boost in 2017. Taproot was a reminder that Bitcoin is a technology that can be changed in order to improve usability and user experience. Taproot’s future success will stand as proof that Bitcoin can adapt

With the asset price of ether outperforming compared to bitcoin, it is not surprising that the dominance of bitcoin, a measure of BTC’s market capitalization relative to the market capitalization of all digital assets, declined during 2021 from 70.2% to 40.1% to 40.1%. ETH isn’t the only reason Bitcoin is giving up its dominance; Instead, crypto projects have emerged with many different use cases that are not in direct competition with Bitcoin.

Ethereum has major catalysts from EIP 1559 to the imminent move to Proof of Stake. Both events play important roles not only in the growth of Ethereum as a technology, but also in developing a narrative of the origin of Ethereum’s origin. EIP 1559 cemented ether’s role as a “gas” within the ecosystem, demanding that the asset be used and burned in exchange for building on or interacting with the network. Proof of Stake “consolidation” is an attempt to create a secure and scalable contract network more intelligently without the need for miners and significant energy consumption.

Ethereum was the catalyst for the initial coin boom and bust in 2017/8 and the first wave of Decentralized Finance (DeFi) came out of the embers. During 2019 and 2020, Ethereum-based projects such as Uniswap, Compound, and Aave (formerly Lend) found their foothold. By using the rising cryptocurrency market and mining liquidity (token incentives) as fuel, DeFi projects have been able to generate billions of dollars in liquidity for decentralized lending and efficient trading markets.

Ethereum can also owe much of its rise to the emergence of non-fungible tokens (NFTs), which brought the protocol into the mainstream. NFTs are unique tokens that can serve as digital representations of physical items or digitally authentic items that can be verified as proof of ownership on the public blockchain. As such, NFTs are trying to stand as the first iteration of digital ownership of holdings on the blockchain. OpenSea was the darling of the NFT sector in 2021, bringing a digital arts market to retail investors.

Within the world of institutions and regulation, capital has flowed into blockchain and crypto companies. According to Blockdata data, these companies received $23 billion in funding in 2021, which is more than the total amount raised from 2017 to 2020. We even saw a $1 billion capital increase in December for NYDIG, and FTX raised more than $1 billion. through two rounds of financing.

From a regulatory perspective, governments around the world are taking digital currencies very seriously. We have seen China ban Bitcoin mining and cryptocurrency trading. India and Nigeria have tried to follow suit. The Bank of England said the growth of crypto assets is a potential threat in its Financial Stability Report as it becomes increasingly linked to broader financial networks. The word “crypto” even reverberated in the halls of Congress as the $1 trillion infrastructure bill was put on hold in part due to a crypto-tax clause. Regulators’ participation and discussion about cryptocurrencies indicative of the common belief that cryptocurrencies are here to stay, and for that reason, they should be regulated “to keep citizens safe.”

2021 was an exceptional year for the cryptocurrency and blockchain industry. Bitcoin and Ethereum asset prices touched all-time highs; Traditional companies such as Visa have bought NFTs such as CryptoPunks and Bored Apes; Stephen Curry bought a bored monkey So did other professional athletes. Politicians routinely discussed encryption policy; China Bans Bitcoin Mining and Cryptocurrency Trading; Coinbase went public at a valuation of $100+ billion as a profitable business; More bitcoin made its way onto MicroStrategy’s balance sheet; Sovereign Nation Bidding for Bitcoin and the Lightning Network More Than Tripling in Size; Legitimate tier 1 smart contract competitors came to Ethereum; More than $20 billion in venture capital and financing flowed into businesses; Bitcoin implemented extensive protocol improvement, as did Ethereum as it moved toward consolidation and proof of stake; The Bitcoin ETF started trading in the US and debuted with the second largest volume ever; DeFi has taken over the virtual world with promises to reshape the old financial system. This and much more on the following pages.

Thanks to 2021, most people have at least heard of cryptocurrencies by now.

Read the full report here by CoinDesk.

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