- Inflation — given the on-going increases in energy prices for various reasons, essentials are becoming more and more expensive. Food, water, commodity & housing prices are all rising. Inherently, this causes the price for running crypto businesses to increase, you need to pay more for your real estate, your data centres, your software engineers.
- Interest Rates — To combat inflation, central banks typically increase interest rates. Some say the Fed could make 7 rate hikes this year alone. Given we’ve lived through a historic period of low interest rates, many companies and individuals have borrowed money and maintaining these loans will become more expensive as rates go up. This impacts crypto because it is currently treated as a ‘risk on’ asset and when interest rates go up, companies and individuals sell their riskier assets to pay down their interest & prinicple.
- Regulation — Crypto enjoys a low regulatory environment at the moment. The asset class itself is broad with stable coins, coins mimicking equities, DAOs, money (Bitcoin) and as fuel for smart contract blockchains like Etherum. However as more people make money from the asset class, it is inevitable that governments will want their say and their cut so we can expect new rules for taxation & consumer protections similar to what is available to retail investors when it comes to riskier assets like derivatives & futures.
- Decentralisation — The centralisation of money is starting to show its frailties. Central bankers struggled with recent crises (subprime & covid) and had to devalue their currencies to prop up the financial system. As fiat money is so centralised we’ve seen how easily access can be taken away with financial sanctions which are hurting individuals unrelated to those who are being targeted. Some crypto assets are decentralised and offer censorship resistant store of value (e.g. Bitcoin). While crypto continues to maintain its value (relative to its age) it can be seen a ‘safe haven’ if your fiat portfolio is being devalued because of things you cannot control.
- War — Clearly the on-going war in Europe will have long lasting effects on productivity and growth which ultimately exacerbate inflation and interest rate hikes. Although many effected by the war are turning to crypto it is unlikely it will be in the numbers required to outweigh the other economic macro factors applying sell pressure.
- Global Warming — The EU have tried to ban ‘proof of work’ crypto assets (like Bitcoin) a couple of times now in their Crypto market reform bill. Their argument is that these proof of work crypto assets are using copious amounts of energy, some of which are fossil fuels. However banning an innovation like crypto will only harm the EU in the long run —what if governments banned cars in the 1900s once they realised they were polluting the planet? It’s difficult to weigh the arguments for banning an innovation but easier to ban the use of fossil fuels which are ultimately the root cause.
- Unbanked economy — something like two billion people cannot access financial services because they do not have adequate access to banking. With access to a smart phone and the internet almost ubiquitous, crypto can offer financial services to users with a very low barrier to entry. Many crypto services do not require background checks or even an e-mail address— you can login to use financial services with your crypto wallet and transfer assets seamlessly in real time with anyone anywhere.
This was a mixture of positive and negative macros characteristics which could impact the crypto asset class in 2022. Clearly it’s going to be an interesting year to see crypto grow, be adopted and be regulated. Make sure you do your own research and get involved where you can.