The year 2021 has seen a stunning year for Bitcoin and many of the other cryptocurrencies.
It is difficult to believe that, on January 1, one Bitcoin could be purchased for less than USD $30,000. The price has more than doubled and, by early November, had reached its all-time high of USD $67,500. JP Morgan has reiterated its price prediction for 2022 that Bitcoin can scale up to USD $146,000 in the “long term” but also warned of sharp spikes downward, like what we saw in early December.
There have been some innovations around Bitcoin that have certainly aided the cryptocurrency’s spectacular performance.
One innovation that galvanized the usage of Bitcoin as a viable currency for payments was the Lightning Network. It played an influential role in the most momentous event of 2021, announced at Bitcoin 2021, in Miami: El Salvador’s decision to make Bitcoin legal tender. The central American country is now building a Bitcoin City that will run Bitcoin services through the Lightning Network, financed through a Bitcoin bond. More about the Lightning Network later in this article.
So, what could possibly lie in store for Bitcoin in 2022? There are many reasons to be bullish. Let’s go through them.
Since 2020, we have seen the rise of ‘decentralised finance”, or DeFi, and non-fungible tokens (NFTs). DeFi is a set of reproductions of traditional financial assets such as lending platforms and trading, recorded on a tamper-resistant blockchain, that has pulled many of the functions of Wall Street into the cryptocurrency space. NFTs are tokenized assets which have formed decentralized marketplaces. NFTs form a large part of the DeFi space.
We are likely to see the continued institutional adoption of cryptocurrencies with some of them offering services that until now have only been available through conventional banking. For example, Mastercard is setting up a payment ecosystem which allows for Bitcoin payments. Large institutions, such as Bank of America and Goldman Sachs have made Bitcoin-based assets available to their investors.
What this amounts to, is a race between DeFi and conventional finance, including the large banking institutions, looking for a share of the Bitcoin ecosystem. We will likely see DeFi compelling the legacy Wall Street institutions to compete with hitherto unregulated DeFi. The race will massively increase Bitcoin adoption going into 2022. There is a large section of conventional finance that will only enter the space once it gets the regulatory green light. As US and Canadian regulators have taken a benign view of Bitcoin (on the whole… at least they won’t try to ban it), then 2022 could witness a whole new group of financial institutions entering the crypto space.
So, 2022 will likely see the continued expansion of the DeFi and NFT space along with more Wall Street institutions making crypto assets available.
Is Bitcoin an inflation hedge?
Within just one month, the news media shifted from echoing the Federal Reserve’s message to the American people that “inflation is transitory”, to “inflation is good for you”, ergo ‘inflation will be permanent but look on the bright side’. Take from that what you will! But most people realise that inflation is not a good thing because wages have never kept up with costs.
Meanwhile, Michael Saylor, CEO at MicroStrategy, stated that bitcoin was an inflation hedge Michael Saylor – Bitcoin is the Best Hedge Against Inflation. He believes that while central banks continue to expand the currency supply with hard assets becoming, first, more scarce and, secondly, with their appreciation exceeding that of the currency supply expansion, bitcoin will exceed inflation also, by virtue of being one of these inflation-busting scarce assets.
The year 2022 will test Saylor’s thesis. Right now, December 2021, bitcoin has been failing as an inflation hedge. Early that month, the US government announced that inflation had risen to 6.8% during November.
However, also during November, bitcoin’s price fell from USD $61,300 to USD $57,770, leading to a whole raft of articles stating that bitcoin was not an inflation hedge. The negativity seems to be on the back of disappointment that all those earlier predictions of USD $100,000 bitcoin by the end of 2021 are now looking unlikely to be realised.
It can be argued that bitcoin had been outperforming inflation all through the spring and early autumn of 2021 and is taking a breather, or, awaiting incoming institutional investment.
National governments doing competitive mining
It seems that, away from the public eye, national governments have indeed caught the Bitcoin bug. It’s not just individuals and bankers who have recognised the value of Bitcoin, it is also sovereign governments. We have seen countries express that recognition by granting Bitcoin legal tender status.
However, a trend of sovereign governments starting to mine bitcoin has not been well reported in the news. El Salvador’s Bitcoin City will start this as part of its pro-Bitcoin move, but significant geopolitical rivals like the USA, Iran and North Korea have begun engaging in concerted moves to mine bitcoins. The USA is looking into bitcoin mining for “national security” reasons, Iran and North Korea as a means of bypassing US sanctions.
So, we are likely to see in 2022, as the US Dollar continues to lose its integrity through continuous depreciation, nations approaching Bitcoin mining for strategic advantage.
Lightning as Bitcoin’s payment network
The innovation of the Lightning Network will likely prove to be Bitcoin’s breakthrough. Without the Lightning Network, transaction times on Bitcoin’s main chain are significantly slower (approx. 10 minutes per block) and best practice is to let six blocks pass for the transaction to be considered confirmed. As activity increases within the network, this can leave users vulnerable to the miners charging more expensive fees in order to process one’s transactions expediently.
Lightning solves this problem by running a second-layer network alongside Bitcoin’s first layer. Payments on the Lightning Network bypass these validations and long confirmation wait times that are characteristic of the Bitcoin blockchain. Lightning makes Bitcoin more liquid because the payments on the network are significantly faster and cheaper. Indeed, the presence of Lightning was a crucial factor in El Salvador’s adoption of Bitcoin as legal tender.
The Lightning Network will likely be the driver of further institutional adoption of Bitcoin as we go into 2022.
Some closing thoughts
Mark Twain once said: “It is always difficult to make predictions, especially about the future”.
He said it from one side of his mouth but Bitcoin is not the only thing evolving at the moment: people’s trust in centralised authorities has never been so low, the fallout from the COVID pandemic can bring a whole raft of unintended consequences, and we have a financial and banking system that has been on life support since 2009. Each of these factors influence each other and may have a bearing on Bitcoin… but in what ways, only 2022 will tell.