Smith School of Business – Insight

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The year 2021 was marked by several major advances for cryptocurrencies.

On the one hand, new crypto applications such as non-fungible tokens (NFTs) have gained ground, with sales of these digital assets setting new records at major auction houses. Second, Bitcoin has made strides towards mainstream acceptance, with major websites such as Expedia and Microsoft accepting the coin as a medium of exchange. Third, in September, El Salvador became the first country to accept Bitcoin as legal tender.

There are many more examples of the expansion of the cryptocurrency market over the past year. With this resumption of activity, what awaits us in 2022 for cryptocurrencies?

We believe there are three main areas where cryptocurrencies will gain traction over the next year: greater acceptance of Bitcoin as a payment method; increased regulatory oversight; and an increase in NFT activity.

Who Uses Bitcoin?

Understanding what motivates individuals to adopt Bitcoin has been a challenge for researchers. A recent study suggests that five main factors contribute to the likelihood that a person uses Bitcoin:

Trust in the system Word of mouth online Quality of web platforms available for the transaction Perceived risk of the investment Expectations regarding Bitcoin’s performance

Other studies have added more nuance to this argument by considering gender, age and level of education as equally important factors.

Conditions in the crypto space have made it increasingly likely that Bitcoin will become mainstream in the near future.

First, there is increased activity in online communities such as Twitter and Reddit, where even crypto newbies can exchange information with seasoned investors for word of mouth advice on price predictions and trading strategies. trading.

Second, there has been an explosion of new crypto exchanges – or trading platforms where fiat currency can be exchanged for crypto – and major investments in the technological infrastructure of existing exchanges. These infrastructure investments have broadened access to crypto markets and sparked the interest of institutional investors.

Institutional interest

Last year, institutional players such as the European Investment Bank (EIB) – the lending arm of the European Union – took a stand on crypto.

In April, the EIB issued a € 100 million digital bond on the Ethereum blockchain. Goldman Sachs, Banco Santander and Société Générale also participated in the issue. Research has indicated that institutional adoption is a turning point for widespread adoption of crypto, and it looks like we are moving quickly down that path.

All in all, the increased availability of outlets that accept Bitcoin as a medium of exchange and institutional investment in the space will likely lead to greater acceptance of Bitcoin as a payment method in 2022.

After cryptocurrencies, decentralized finance (DeFi) is widely seen as the next frontier in fintech. DeFi offers the ability to create decentralized systems that leverage distributed ledger technology to facilitate peer-to-peer lending, create new financial securities as stablecoins, or even offer new models of corporate governance.

Waiting for regulators

Regulators also appear to be increasingly vigilant. In November, the European Council, the body that sets the political priorities of the European Union, announced its position on the Crypto Asset Markets (MiCA) framework, which will provide increased regulatory clarity on crypto assets and DeFi.

That same month, the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, and the United States Office of the Comptroller of the Currency issued a joint statement announcing that they would produce a set of policy guidelines on crypto.

The researchers highlighted the lack of regulation as a major obstacle to the acceptance of traditional crypto. Increased government oversight, coupled with the decision of several countries to consider digital versions of their national currencies, is expected to result in much more regulatory activity in 2022.

NFT activity on the rise

The year 2021 brought a new wave of NFT sales. An NFT can offer proof of ownership, for example, of digital art in the same way that a physical canvas can offer proof of ownership of a Vincent Van Gogh painting. Although NFTs started out as a way to formalize digital art ownership, it has since expanded to include other types of digital property, including digital real estate.

NFT sales set new records – a recent one brought in US $ 17.1 million at Sotheby’s. As a result, the auction house launched Metaverse, an NFT-only marketplace to facilitate sales of digital works.

As new NFT applications emerge, this space will likely continue to grow in 2022.

Just say no to crypto?

Despite these investment opportunities, we urge crypto investors to be skeptical of the claims they read in online communities. At a minimum, crypto enthusiasts should do their due diligence before investing.

What is sure to emerge in 2022 are new frauds and new schemes. Take, for example, the crypto SquidGame which capitalized on the popular Netflix show but was a fraud. Or the fake Banksy NFT which sold for £ 244,000.

Research on the behavior of retail investors has found that some are very sensitive to the “fear of missing out”.

Therefore, it can be difficult to turn down a tip from your barber or your best friend’s cousin on the next hot crypto opportunity. Crypto investors, however, should educate themselves about the technology and the basics of the financial markets if they are to become cautiously involved.

Crypto, after all, is still speculative and not for everyone.

Erica Pimentel is Assistant Professor of Accounting and Assistant Director of the CPA Ontario Information and Professionalism Center at the Smith School of Business. Bertrand Malsch is a PriceWaterhouseCoopers / Tom O’Neill member in accounting and director of the CPA Ontario Center for Information and Business Professionalism in Smith. Nathaniel Loh is a member of the CPA Ontario Information and Professionalism Center.

This article first appeared on The Conversation.

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