Fidelity Digital Assets Report: 2021 Trends and Their Potential Future Implications

2021 will undoubtedly be a turbulent year for Bitcoin — from around $29,000 at the beginning of the year to around $47,000 at the end of the year, Bitcoin is up 64% in 2021. The first was a rapid rise to an all-time high of over $63,000 in April (up over 100% in a few months), followed by a drop of over 50%. By late July, Bitcoin had been pushed back to its start-of-year price of just under $30,000. That was followed by an all-time high of more than $67,000 in early November. Bitcoin is now trading around 31% below its recent all-time high. Below we will review some of the major events and milestones taking place in the digital asset space.

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Over the past year, both retail and institutional investors have seen increased awareness and respect for Bitcoin and digital assets.

The Fidelity Digital Assets 2021 Institutional Investor Survey found that 71% of U.S. and European institutional investors surveyed intend to allocate digital assets in the future. This number has grown in every region surveyed over the past three years, and we expect institutions’ current and future asset allocation to digital assets to increase further in 2022.

In 2021, product availability has also increased significantly as crypto and traditional investment firms launch several fund vehicles in an attempt to meet the needs of retail investors, investment advisors. While spot ETFs have not been approved, the acquiescence of several futures-based bitcoin ETFs is a bright spot and leaves hope that other products and services related to the digital asset may be approved in the future. Recognition by regulators will be key.

Today, the market capitalization of digital assets is just over $2 trillion. Despite its impressive growth rate, it’s still relatively small compared to the hundreds of trillions of dollars in assets around the world. As crypto companies continue to push the boundaries of what is possible and create innovative products involving digital assets, new regulation is definitely needed. Appropriate regulation and financial firms working together to provide investors with access to this asset class could increase the overall adoption rate of digital assets. Proper guidance from regulators reduces investor concerns about compliance and risk. In that sense, as we head into 2022, we expect some sort of reflexive loop between regulators, financial firms, and allocators. Regulation and product access go hand in hand, and we hope 2022 will bring more clarity than previous years, as we believe this is the key to bringing the majority of the hundreds of trillions of traditional assets into the digital asset ecosystem.

Government and Regulatory Developments – Different Paths, Where the U.S. Is Heading

Over the past year, governments around the world have made some major moves when it comes to digital assets. We’ve seen multiple bans from China, most notably a call for a crackdown on mining in May, then a document in September detailing all cryptocurrency transactions to be illegal, and finally, an announcement in November Turn off all mining.

The government of El Salvador did the opposite, becoming the first sovereign country to accept bitcoin as legal tender (El Salvador still uses the US dollar, but all businesses must also accept bitcoin as a payment method). Additionally, El Salvador has launched its own digital wallet, distributing free bitcoins to its citizens. El Salvador’s president has repeatedly announced that the country has purchased bitcoin as a reserve and will provide $1 billion in “bitcoin bonds,” half of which will be used to buy more bitcoin and the other half to be used for related bitcoin infrastructure.

We believe that time will surely tell which path is more successful. History shows that capital flows to the best places, and embracing innovation leads to more wealth and prosperity. We also believe that if Bitcoin adoption increases, countries that acquire some Bitcoin today will be more competitive than others. So even if other countries don’t believe in Bitcoin, they will be forced to buy some Bitcoin as a form of insurance. In other words, a small cost can be paid today as a hedge against potentially larger costs in the future. So we wouldn’t be surprised to see other sovereigns buying Bitcoin in 2022, and possibly even central banks.

While we previously mentioned the lack of regulatory clarity on digital assets in the US, an interesting development in 2021 is the broad digital asset regulation included and passed in the latest infrastructure bill. The legislation is relatively vague and far-reaching, especially in its definition of “brokers,” which may impose requirements not only on traditional brokers, but also miners, hardware manufacturers, and software developers. The legislation won’t come into effect until 2024, and a number of amendments have already been proposed. What we think is most notable is that digital asset regulation becoming law is another milestone as the digital asset class matures and becomes established.

Bitcoin Mining – A Year of Resilience and Optimism

As mentioned above, Bitcoin’s hash rate plummeted by more than 40% in the months from May 2021 to July 2021 as China banned all proof-of-work crypto mining. Analysts expect it will take at least a year for the hash rate to return to previous highs. So the most surprising result for 2021 is that the hash rate has rebounded so quickly that the 30-day hash rate is now about 5% above its previous high! According to the University of Cambridge, the US has been the biggest winner of the “great migration” of miners, with an estimated 35% of Bitcoin’s global hash rate currently located in the US, the largest of any country, up from just 35% two years ago 4%.

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Additionally, publicly traded mining companies have shown bullish signs, not only holding more Bitcoin on their balance sheets, but buying more Bitcoin.

The recovery in hash rate is truly astounding, and we think it shows several important issues to keep in mind in 2022 and beyond. First, it points to another real-world risk to the Bitcoin core network: what happens if a large number of miners are shut down? As we all know, mining difficulty will be adjusted every two weeks on a procedural basis, and the network should remain functional, adding a new block of transactions every 10 minutes on average. This has now been tested and Bitcoin’s network behaves flawlessly.

Since Bitcoin miners have the greatest economic incentive to make their best guesses about Bitcoin adoption and value, we believe their recent behavior shows that the current Bitcoin cycle is far from over and that these miners are investing for the long term rather than Profitable in the short term, thus enhancing the resilience and reliability of the Bitcoin network.

Ecosystem expansion

The digital asset ecosystem continues to expand, and the number of promising projects in 2021 continues to grow. The biggest non-Bitcoin themes showcased over the past year include the mass issuance of stablecoins, the maturation of decentralized finance, and early NFTs.

Stablecoins have become an increasingly important part of decentralized finance, growing by more than 385% during 2021, according to Coin Metricsii. NFTs hit the stage at crazy prices in the first half of 2021. At a Christie’s auction, an artist named Beeple sold $69 million in NFTs, setting a record for the highest price ever paid for a digital artwork.

Over the past year, we have witnessed incredible growth in many different use cases.

Amid these trends, we expect institutional interest in DeFi to continue to grow. One of the emerging DeFi themes includes the creation of decentralized cross-chain bridges that attempt to eliminate the need for a trusted third party to facilitate transactions between the two chains. Interconnection between siloed blockchains is a fascinating trend that is important for creating more seamless interactions with digital assets and their users.

As stablecoin regulation and reserve scrutiny heat up, we also believe the dawn of decentralized algorithmic stablecoins has emerged. Regulators are increasingly questioning the reserves held by many large stablecoin issuers and whether the rapid expansion of stablecoins poses a threat to the traditional financial system. This puts many DeFi protocols and users who rely heavily on these stablecoins in a less than ideal situation. Algorithmic stablecoins, whose asset stability is backed by code and using digital native assets, offer a promising solution to the digital asset world.

in conclusion

Overall, we can say that 2021 is a year of further confirmation that digital assets have arrived and are here to stay. We are seeing more and more high profile individual and institutional investors deploying it, more companies adding it to their balance sheets, and even being the first sovereign to declare it legal tender. The Bitcoin network has demonstrated its resilience despite the world’s second largest economy effectively banning it. We have seen a rapid rise in demand for stablecoins, and this parallel money market-like product has caught the attention of regulators. Additionally, digital assets have officially entered the legislative and political arena and are likely to receive more attention. Finally, digital assets are spreading to art, culture, music and gaming. All of this leads us to ask, where do skeptics have to believe that digital assets are not going away?

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/fidelity-digital-assets-report-2021-trends-and-their-potential-future-implications/
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