What really mattered to the crypto markets in 2021

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Through 2021, most people have at least heard of crypto already – not just Bitcoin and Ethereum, but altcoins like DOGE and SHIB, as well as terms like NFT and metaverse.

In CoinDesk Research’s Crypto 2021 Annual Review, we aim to summarize some of the key themes and metrics that marked last year’s progress in the cryptocurrency markets.

Read the full CoinDesk Research 2021 Crypto Annual Review here.

As with all financial assets, market performance is usually the first thing that comes to mind when considering a “year in review”. Bitcoin (BTC) and ether (ETH), the two largest cryptocurrencies by market cap, posted gains far above traditional macro assets, gaining 60% and 407% respectively.

While ether, the native asset of the Ethereum blockchain, still has a way to go before mainstream investors begin to form their investment thesis, bitcoin has cemented itself in the minds of all investors. professionals because it eclipsed $ 1 trillion in market capitalization in 2021. Additionally, bitcoin has also remained uncorrelated with all macro assets, which could be an attractive value proposition for the asset as Managers plan to approach building their portfolio in 2022. That said, bitcoin’s correlation with the S&P 500 increased in the fourth quarter of 2021, suggesting that investors are trading bitcoin and stocks together as risk assets.

Bitcoin adoption and technological development

Outside of market performance, 2021 has been a big year for Bitcoin from an adoption and technology perspective. In June, El Salvador announced that bitcoin would become legal tender; this statement came into effect in September when a law stating that bitcoin must be accepted as a means of payment across the country came into force.

This was accompanied by several purchases of bitcoin by the government, made from the president’s cell phone. Meanwhile, a free $ 30 value of bitcoin was sent to Salvadorans who signed up to use Chivo, the country’s official bitcoin wallet, and a commitment was made to use the Lightning Network, the layer of commerce for Bitcoin (learn more here), to enable a smoother bitcoin economy. The amount of bitcoin committed to the Lightning Network has grown incredibly rapidly in 2021, breathing new life into the digital money use case for Bitcoin.

The story continues

2021 also marked the year of a major technological upgrade to the Bitcoin protocol known as Taproot (learn more here). Taproot is a set 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 Enhancement in 2017. Taproot recalled that Bitcoin is a technology that can change to improve usability and efficiency. user experience. The success of Taproot in the future will be the demonstration that Bitcoin can adapt.

The rise of Ethereum

With the superior asset price performance of ether versus bitcoin, it’s no surprise that bitcoin’s dominance, the measure of BTC market capitalization relative to the market capitalization of all digital assets, has fallen. in 2021 from 70.2% to 40.1%. ETH isn’t the only reason bitcoin is losing its dominance; on the contrary, crypto projects have sprung up with many different use cases that do not directly compete with Bitcoin.

Ethereum had major catalysts from EIP 1559 to the impending transition to proof of stake. Both events play an important role not only in the growth of Ethereum as a technology, but also in the development of a narrative for Ethereum’s native asset. EIP 1559 solidified the role of ether as a “gas” within the ecosystem, requiring the asset to be used and burned in exchange for building or interacting with the network. The “merge” to proof of stake is an attempt to create a secure and more scalable smart contract network without the need for miners and heavy power consumption.

Ethereum was the catalyst for the boom and collapse of the initial coin supply in 2017/8 and out of the embers came the first wave of decentralized financing (DeFi). In 2019 and 2020, Ethereum-based projects such as Uniswap, Compound, and Aave (formerly Lend) have found their way. By using the crypto bull market and cash mining (token incentives) as fuel, DeFi projects have been able to acquire billions of dollars in cash for efficient decentralized lending and trading markets.

Ethereum can also attribute a significant part of its boom to the rise of non-fungible tokens (NFTs), which brought the protocol into the mainstream. NFTs are unique tokens that can act as digital representations of physical items or digitally native items whose proof of ownership can be verified on a public blockchain. As such, NFTs attempt to market themselves as the first iteration of digital ownership of collectibles on a blockchain. OpenSea was the darling of the NFT industry in 2021, providing a digital art marketplace for retail investors.

Capital investment in crypto and DLT companies

In the world of institutions and regulation, capital has poured into blockchain and crypto companies. According to data from Blockdata, $ 23 billion in funding reached these companies 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 has raised over $ 1 billion through two rounds of financing.

Cryptography regulation

From a regulatory standpoint, governments around the world take crypto seriously. We have seen China outright ban bitcoin mining and crypto trading. India and Nigeria have tried to do the same. The Bank of England said growth in crypto assets is a potential threat in a financial stability report, as it increasingly becomes tied to larger financial networks.

The word “crypto” even echoed in the halls of Congress as a $ 1,000 billion infrastructure bill was blocked in part due to a crypto tax reporting provision. The involvement of regulators and the crypto discussions are indicative of the widespread belief that crypto is here to stay and therefore should be regulated to “keep citizens safe.”

Overall, 2021 has been an extraordinary year for the cryptocurrency and blockchain industry. Read the full report here.

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