2021 has been the cryptocurrency industry’s biggest year ever. And that’s not just because token prices went up, which some did by thousands of percentage points, proving that epic crypto gains are still very much on the table. More importantly, crypto growth this year came in the form of major adoption, integration and innovation, such as El Salvador’s bitcoin policy and the embrace of NFTs by major brands and mainstream celebrities.
So what happens after the biggest year ever? Probably a not-as-big year.
This past year was unique, above all because the day-trading momentum that broke out during 2020 COVID lockdowns was carried forward into real adoption and innovation by the likes of Twitter. And crypto is generally highly cyclical, as new converts get overextended and burned, then retreat to lick their wounds and do some learning before they dive back in. 2021 already broke crypto’s formerly clockwork boom-and-bust rhythm, though, so anything is possible.
Even if it is less spectacular than 2021, 2022 will see major moves, such as the launch of Ethereum 2.0 (finally!) and a retreat of NFT-mania (probably!). And given the maturing of the industry, there will be plenty of capital to fund the continued building of interesting projects and plenty of opportunities to get involved if you’re paying attention. There are also major real-world factors that will affect crypto, from U.S. interest rates to inflation to COVID variants – some more predictable than others.
What follows is a mix of my own impressions of what’s coming, and the (usually far superior) insights of other crypto observers. None of it is financial advice, and most of it is probably wrong – but I hope it will help you form your own picture of the road ahead.
The overall token market flattens.
Expect at least a period of unstable and essentially flat token markets. I’m increasingly convinced we won’t see a 2018-style massive drawdown, but 2021 was such a huge year that a reversion to the mean is likely in strictly mathematical terms. I do think there’s a good possibility bitcoin sets a new all-time high above $69,000 by the end of 2022, though I wouldn’t bet on that being sustainable until 2023.
In fairness, I was far too bearish last time around – I thought we’d see a top at around $30,000 back in 2020, but that turned out to be anything but just another cycle. Momentum could very well pick back up, so consider this a projection lightly held.
Elon Musk will continue misleading and confusing people new to crypto.
By the end of 2022, once he’s caught up to the fact that it’s not Nick Szabo, Elon will claim to be Satoshi despite not “getting” proof-of-work (PoW). Craig Wright will sue him for defamation, and much hilarity will ensue.
NFTs keep tanking.
This one’s a bit of a layup since many formerly high-dollar non-fungible tokens are already bleeding, and a lot of those prices were likely manufactured via wash trading in the first place, so they have further to fall. I see the market for “profile pic” and celebrity-branded NFTs in particular coming way back down to earth, since a lot of their price action over the last 18 months has been based on the misperception that they’re “art” and will trade like a Basquiat or Van Gogh.
Few remember but the NFT project cycle was first experienced by the TopShot market:
1. Early adopter lull
2. Explosive growth via speculative demand
3. Increased supply to feed them ducks
4. Back to reality, whoops there goes gravity
5. On to the next one pic.twitter.com/KexvawLIgw
— Sergito.eth 😜 // TheMadPups (@sergitosergito) December 25, 2021
It has been planned for years, but Ethereum’s transition to proof-of-stake (PoS) will finally take a definitive step forward next year as the new PoS Beacon Chain merges with the current PoW chain. That implies a degree of risk, and big advantages to the transition may not arrive until 2023, when the new Ethereum will begin introducing sharding.
Probably the most important thing to note is that at least until sharding is implemented, the PoS transition is NOT expected to affect transaction fees on Ethereum. High fees over the past year-plus have been substantially responsible for the popularity of other layer 1 blockchains like Avalanche, and so the Ethereum upgrade shouldn’t really disrupt that momentum (see below). (Note: The ETHDenver conference in February will be a good opportunity to get caught up on the nuances of all this.)
Layer 1 diversity is real.
One of the most genuinely bullish things I’ve seen this year is the fragmenting of user interest for real, meaningful applications across a number of blockchains. In the NFT sector, for instance, we’ve seen serious uptake not just on Solana, but on Tezos and other blockchains.
However, as the Bankless team discussed on its “5 Things We Got Right” episode, there are good reasons to think that over the longer term, it’s more likely that there will be two or three dominant smart contract chains than, say, five or six. Next year will be an expansion in the diversity of platforms people actually use, but it will be followed by real competition and, eventually, re-consolidation.
The Great Token Decoupling continues.
“Decoupling” here means that various crypto assets will stop simply tracking bitcoin’s price. Instead, each will see returns based on its individual value proposition. Decoupling has been happening slowly for years, but the process really accelerated in 2021.
The difference between the highest crypto returns and the lowest was truly dramatic: Layer 1 tokens solana (SOL) and terra (LUNA) returned 8,000% or more, while aging or flawed projects like EOS and internet computer fell more than 80%. The lesson is clear: It’s no longer enough to be “in crypto.” As with any investment, where you put your money really does matter.
For more on decoupling, see this year’s edition of Messari’s crypto theses, an annual must-read and a great way to get caught up on the year’s many transformative moments.
Bitcoin mining’s big sort.
Arcane Research predicts that we’ll see more bitcoin mining bans next year in countries with weak grids or low energy supplies, “while other energy-rich jurisdictions will embrace the industry.” It’s sad that countries and their citizens will see restrictions on their involvement in Bitcoin, both for their own sakes and because more distributed mining is better for the network itself.
But in the medium term, there are upsides here. The banning of mining in countries without sufficiently robust or sustainable electric grids should push more hash power toward cleaner energy, potentially blunting some of the one-sided environmental, social and governance (ESG) criticism that blew into the mainstream this year, largely thanks to Tesla’s Elon Musk.
Stocks keep going up, but more slowly.
Goldman Sachs predicts a 9% rise in the S&P 500 index. That’s not as much as this year, when the index went up 27%, but it would still be very healthy. On present fundamentals, it’s a defensible bet – the latest unemployment report, for instance, came in under projections, and consumer demand remains high many months after pandemic stimulus payments ended.
The lingering question is whether stocks have much room to run given how overextended price-to-earnings ratios already are. Tech and growth stocks like Tesla have been rocky in recent months, for instance leaving Cathie Wood’s Ark Innovation Fund down a sobering 20%. And CNBC’s recent Millionaire Survey finds that rich investors are losing their appetite for risk, which could let even more air out of the tires.
The Fed gets tight.
The U.S. Federal Reserve will be shrinking its bond-buying program starting in January, and is also expected to raise interest rates in 2022. That will have complicated and frankly uncertain impacts for crypto. In theory, it should help tamp down inflation, but could also put downward pressure on speculative investments that have attracted some of the loose money of recent years.
Keep in mind, though, that at least in conventional economic terms, this is good news. Near-zero interest rates only benefit people selling low-quality, high-risk investments. A rise of a point (or even two) would mean that we have room to move downward next time there’s a recession, providing a big advantage for U.S. long-term stability.
Bitcoin’s inflation narrative is tested.
As I’ve written recently, bitcoin didn’t respond to rising inflation the way it should have according to the “inflation hedge” thesis laid out by many advocates. As I argued, that’s because adoption hasn’t reached a point where the underlying price is stable enough. But if inflation continues or accelerates, even just for the first half of the year, bitcoin will need to show a market response for the narrative to remain credible in the medium term.
Tungsten cubes collapse.
Watch for secondhand cubes on eBay, but keep an eye on those shipping costs.
Meme coins wipe out.
Meme coins are basically a casino, but they enjoy positive feedback loops, because winners draw major public interest that keeps the wins rolling. Conversely, a downward or sideways cycle can be exceptionally brutal. 2022 will see less ape-like behavior among crypto newcomers and a consolidation around informed investment. That means coins like doge will continue losing steam (it peaked all the way back in May), and new pumps will have limited upside.
(Shiba inu is an interesting exception here, and a possible demonstration of how to turn a meme into a real project. Its ShibaSwap DEX is at least on its face fairly interesting, though I can’t say for sure whether it would elevate the project out of meme coin status even if it succeeds.)
The BUIDLers keep BUIDLing.
Believe it or not, flat or down markets tend to be very interesting times to be in crypto. The annoying shillers fall away and the engineers and others who are actually creating things have time to focus on the task at hand. Projects I’m excited about in the next BUIDL phase include Arweave, an innovative distributed storage system; Sign-in With Ethereum, which is pretty much what it sounds like; and whatever Jack Dorsey has planned at Block (formerly Square).
Rough waters for old hands.
The ascendance of Avalanche, Terra, Solana and Polkadot this year spells the end of real momentum for many projects that have been around for a while. They promised big things for years, but underperformed both technologically and in the markets during the biggest year in crypto so far. A partial list of projects I’d put in this category includes Litecoin, IOTA, Cardano, EOS and Hedera, based either on a lack of developer interest or technological mismatches with the direction the ecosystem is going.
Universal bull/bear markets might be a thing of the past?
Right now I’d say we are here broadly speaking
– DeFi 2.0
– DeFi 1.0
And this will surely change next year
— Spencer Noon 🕛 (@spencernoon) December 22, 2021
USD inflation will peak.
It may even retreat by the end of next year. Sentiment is a huge factor in inflation because it guides forward-looking price and salary setting. Inflation seems likely to continue into early 2022 – for instance, food manufacturers have already announced price increases that will go into effect in January.
But there’s reason to expect cooling in the back half of the year. The death of President Biden’s Build Back Better is important symbolically for business sector sentiment and planning for inflation – whatever your feelings about the bill itself, its potential benefits to Americans or the scale of its actual potential impact on the money supply.
Further, early signs from South Africa are that the Omicron wave of COVID-19 will be relatively brief (mostly because it is so infectious). That could mean a lot of the pressures driving U.S. inflation over the past six months could start letting up by June or July. That includes supply bottlenecks caused by a lack of farmworkers and manufacturing shutdowns in China, and the unprecedented surge in durable-goods demand, which should taper off as people continue returning to some semblance of “normal” life.
Also remember that whatever the larger COVID picture looks like, summer will likely be a very low period, which should put at least temporary downward pressure on the goods consumption that has made up much of inflation.
DAOs will attract serious regulatory attention.
But in an abstract theoretical way – we might not see actual rules or enforcement unless someone uses a decentralized autonomous organization to do something truly insane. There’s a lot of talk about how DAOs are “the new corporation” and governments tend to regulate those. This is also where the rubber hits the road for decentralization: There will be some truly decentralized organizations that will be able, to one degree or another, ignore regulation. Those faking it will get smacked down.
Stablecoins get regulated.
That means both more enforcement actions from the U.S. Securities and Exchange Commission & Co., and at least the beginnings of a real rulemaking push. The good news is, U.S. regulators seem to be open to letting stablecoins exist. As investor Lyn Alden has pointed out, a regulated stablecoin market would basically mean a huge new infusion of Treasury-bill-backed liquidity worldwide. To me, that sounds like a formula for upward pressure on crypto asset prices, for better or worse.
In other words, if stablecoins are backed in part by Treasuries, and the stablecoin market cap continues to grow, this is a new source of demand for US government debt.
Cash and Treasuries of various durations get mixed together in a basket, blurring the line between them.
— Lyn Alden (@LynAldenContact) December 28, 2021
More nations adopt bitcoin.
Immediately after El Salvador announced its new bitcoin policy, reports came in that other countries, mostly in South America, were considering similar moves. They just got a strong nudge from the Bank of England, which on Dec. 21 was given the go-ahead to essentially seize nearly $2 billion of Venezuela’s gold reserves. Instead, it may hand the gold over to Juan Guaido, a Venezuelan “opposition leader” beloved by Western intelligence agencies.
This sends a clear message to any country that dares push back against neoliberal hegemony: Not your bank, not your gold. Bitcoin presents a clearly appealing alternative to that threat.
Turkey descends into chaos.
President Tayyip Erdogan’s long campaign for total power ends where these things usually do: with an unchecked autocrat making terrible decisions because no one can afford to tell him the truth. His bizarre prisoner’s dilemma monetary policy lasts weeks, not months. Bitcoin traffic in Turkey continues to surge. This is the hyperinflation your parents warned you about.
The pandemic “ends.”
In his year-end blog post, Bill Gates projected that we’ll see an effective end to the COVID-19 pandemic next year. While Gates’ emphasis is on vaccines, it seems much more likely right now that the hyper-infectious Omicron variant will end the pandemic by infecting more or less everyone who isn’t already vaccinated (and killing a substantial number of them).
Facebook’s “metaverse” eats absolute shit.
Early quarterly reports on virtual-reality sales and usage are either bad or heavily massaged. Then the company redefines what it means by “metaverse” in the same way it kept retreating on Libra. Hundreds of millions of dollars are wasted. In retrospect, everyone agrees that the idea of a social network you have to put on goggles to use was extremely stupid all along.