As an emergent and inherently volatile asset class, cryptocurrencies such as bitcoin, Ethereum and others might seem to defy predictive modeling and forecasting. But blockchain analysis of millions of global crypto transactions and asset-holding behaviors are revealing trends, potential indicators and other intel that investors can use to anticipate what’s coming next. Here are 10 predictions from Philip Gradwell, Chief Economist at Chainalysis, the blockchain data platform and industry leader. While the following is not investment advice, he recommends that institutional investors consider these 10 factors when advancing their cryptocurrency strategies through 2022.
1. Look for bitcoin to hold its $36,000 price floor. “There’s data-driven evidence that people are willing to buy and hold bitcoin at that $36,000 level, and we’re expecting it to maintain this price floor through the summer of 2022,” says Gradwell.
2. There will be strong efforts to bring investment “gold standards” to bitcoin. The initial waves of institutional investors who bought bitcoin were willing to tolerate its many immature flaws and risks, but the next crop of potential investors wants to see those issues fixed, says Gradwell. “In the next year, expect to see a great deal of work in the cryptocurrency industry to accomplish that and bring bitcoin up to the mature ‘gold-standard’ criteria of traditional investments.”
3. The ESG problem will be strongly addressed, if not solved. With many large investors demanding action, “we’ll see the cryptocurrency industry provide a lot of data on the energy and climate impacts of mining coins and tokens, and also take action to lower that footprint – in the same way that people use renewables or offsets now,” says Gradwell. “The industry will start on the road to solving the ESG issues and that should increase investor confidence.” While the decentralized nature of cryptocurrency makes taking coordinated actions far more difficult to achieve than in older industries – such as oil – Gradwell believes groups such as the bitcoin Mining Council will continue to gain influence to effect real change, while Ethereum may implement its energy minimizing Proof-of-Stake upgrade.
4. Expect more regulations. They will probably hit stablecoins and decentralized finance first. “We’re going to have a lot of ‘perimeter setting’ in the next year, with several agencies saying, ‘this is within our perimeter to regulate,’” says Gradwell. “Regulation will come with tradeoffs, but I expect it to further push up cryptocurrency adoption and that’s the most important thing.” Greater adoption leads to more demand, which leads to higher prices.
5. Liquidity will surge. “As more institutional investors buy and sell large amounts of cryptocurrency in shorter intervals – unlike retail investors who tend to buy and hold for long periods – this will drive up liquidity,” says Gradwell. “It’s a key sign of a more mature market.”
6. Bitcoin and Ethereum will continue to dominate for large investors. “These two well-established cryptocurrency forms have the most maturity to take on institutional investors, and holding them makes strategic sense in the uncertain and inflationary period we’re going into,” says Gradwell.
7. Criminal use will decrease – at least in one way. “The illegal uses of cryptocurrency will decrease as a percentage of all transactions, though it will increase in absolute terms as adoption rises,” says Gradwell, noting that efforts to curb crime have already yielded tangible results. “For example, the significant criminal activity and money laundering that was happening on bitcoin can now be tracked and caught by anti-money laundering programs. Going forward, criminals will have a more difficult time as regulators and law enforcement continue to get more sophisticated in their approaches.”
8. Skeptics who fear catastrophic collapse will continue to dwindle in number. “There’s been a sea change in perspective in the last few years, as cryptocurrency went from a small-time industry in 2017 to a global economic industry in 2020 and built the critical infrastructure it needs to be a mature asset class,” Gradwell says. In just three years, the industry built proper corporate structures, worked out how to execute trades at scale, fixed custody issues so investors can store their assets safely, and saw adoption by large banks, he notes. “All those accomplishments, as well the fact that industry endured some major stress tests in 2021, are giving many former skeptics confidence that cryptocurrency is here to stay.”
9. Investors will develop a deeper understanding of the fundamentals that drive the market. As with traditional asset classes, investors will increasingly factor these fundamentals into investment decisions and rely less on gauging short-term market momentum.
10. Growth must reflect maturing standards. Institutional investors may no longer consider crypto’s rapid chaotic growth from 2017 through 2020 to be a disqualifying feature, but a repeat of that in any area could make their comfort vanish. “Another period of rapid, chaotic growth could have big negative consequences for the cryptocurrency industry and greatly decrease the liquidity in the market – and the industry is aware of this,” says Gradwell. “If there is additional rapid growth, they know they must explain what’s going on to institutional investors in a very clear way.”
The only certainty in crypto…
For all the unknowns that still swirl around cryptocurrency, the industry’s leaps in maturity and market share since mid-2020 almost guarantee that large investors will no longer tolerate or dismiss it as a mysterious alternative asset class that isn’t subject to rules or norms. Going forward, they’ll regard it as an essential asset class that they must approach with the same caliber of data-driven scrutiny that they give any other investment category in their portfolio.
The speed, depth and accuracy of the blockchain analysis that institutional investors rely on will be a determining factor in whether they capitalize on opportunities in the next year…or become an unwilling part of another cautionary tale. And it may not be a tale about the perils of managing risk poorly; it may be a lament of missing the early signal of a trend or development that other institutional investors moved on to reap significant gains while still protecting their capital.
“Chainalysis can be a data partner and educational partner to institutional investors as they make decisions about cryptocurrency,” says Gradwell. “And that’s not just in buying an asset, but also investing in companies or product development. All these decisions need to be driven by data, and we offer institutional investors the most comprehensive and in-depth view of cryptocurrency information in the industry.”