Why 2022 Could Be the Year of the Cryptoactives

Bloomberg Línea Ideas — The digital economy has become enormously important in the last two years. In a way, the Covid-19 pandemic accelerated a process that had been a long time coming. Bitcoin, Ethereum, NFTs, fan tokens, or real asset-backed tokens have captured the attention of institutional and retail investors.

In 2021, we saw Bitcoin price records, the explosion of NFTs - the so-called non-fungible tokens - and the growing discussion about the possibilities of using cryptocurrencies in the so-called Metaverse. While regulators around the world are trying to understand this market, developers of games or applications linked to decentralized finance are creating new assets and technologies.

This move has ended up attracting the attention of venture capital funds. According to data from PitchBook Data Inc, as reported by Bloomberg Línea, these investors have injected more than US$30 billion into cryptocurrency companies in 2021. This figure exceeds the sum of what was invested in this industry in all previous years and is almost four times more than the previous record, in 2018, when venture capital funds allocated US$8 billion to crypto companies.

Despite this immense advance in 2021, the digital economy has even more room to grow in 2022. In September, Bloomberg analyst Mike McGlone said the Bitcoin could reach US$100,000 in the second half of this year because demand will continue to grow, while Bitcoin supply is limited.

And where will that demand come from? From all market segments. Cryptoassets are already a reality as they are part of the portfolio of several companies and individuals. Therefore, institutional investors around the world have a fiduciary duty to evaluate any exposure to these assets. And that is what they will do in 2022.

In Brazil, pension funds, for example, are having difficulty meeting their actuarial goals due to high inflation and poor equity performance. In other words, there is a strong argument to think that these funds will start allocating resources in crypto. The demand for lighter and less expensive funding instruments, with fewer intermediaries, is also a long-standing demand from the institutional market.

In the retail sector, retail investors around the world will also seek protection against inflation. In countries such as Mexico, due to a large number of migrants, cryptocurrencies already serve to speed up and lower the cost of remittances; in Argentina, to protect against an extremely devalued peso. And what about companies? Many, such as Tesla and MicroStrategy, are already allocating resources from their coffers to cryptocurrencies. Brazilian companies will follow suit. It is a matter of time. Perhaps, this decision will be made in 2022.

This process is proof that the digital economy has entered a virtuous circle. In 2022, regardless of the excess liquidity in the world, cryptoactives will attract new investors and take a significant portion of the resources currently invested in assets in other market segments, such as equities, fixed income, mutual funds, etc.

Market regulation is part of this circle. In Brazil, motions in the Senate and the Chamber of Deputies have brought the country close to having specific legislation for the segment, with its main players, the stock exchanges, supervised by a regulatory body. Although this market already operates in a regulated manner, as it pays taxes and reports data to the Treasury and COAF (Financial Activities Control Board), in the Brazilian case, a specific law for the sector is healthy and will help attract even more investors.

In this context, non-native cryptocurrency companies will try to gain a share, acting in various segments, such as tokenization or crypto-asset trading. Competition is always welcome. However, the new players will not be able to compete on a level playing field with crypto-native entities. Since the early days of the new digital economy, these companies have been gearing themselves up for this moment: they have been investing heavily in innovation, security, specialized equipment, and the creation of market infrastructure. Moreover, as we have seen above, cryptocurrencies are highly capitalized after receiving billions of dollars from venture capital funds.

For about a decade, the cryptocurrency world was accompanied by the question, “Would you invest in crypto assets?” The question that will be with us in 2022 will be “When will you invest in crypto assets?”

This text does not necessarily reflect the views of the editorial boards of Bloomberg Linea, Falic Media, or Bloomberg LP and their owners.