User adoption goes mainstream
Welcome to the first of a series of previews of Sygnum’s Digital Asset Outlook 2022 to be published in January. Here we focus on the pivotal change in the mainstream acceptance of crypto assets – the rising use of cryptocurrencies as a method of payment and store of value, and the fast user growth of applications built on top of blockchain networks – that has increased the intrinsic value of the asset class.
User adoption is a particularly important metric for decentralised technologies due to network effects, which increases the platform’s value at a faster rate than the increase in new users. At the same time, the proliferation of scaling solutions and highly scalable new blockchain protocols have eliminated many of the bottlenecks in cryptocurrency transactions – namely costs and speed. We look here at the key factors that will pave the way for accelerated user growth in 2022 and generate increasing value for the market-as-a-whole.
Mainstream use of cryptocurrency in payments
There has been demand for some time from crypto holders to use their crypto assets to pay for a broad selection of goods and services without having to first convert it to fiat. But it wasn’t until 2021 that major payment services providers (including Visa, PayPal, MasterCard) have embraced cryptocurrencies. According to a PYMNTS survey, 10% of financial institutions support at least one cryptocurrency already. Meanwhile the demand for such services keeps growing, too: a MasterCard survey found 40% of consumers plan to use crypto in the next 12 months.
2021 saw the surprise adoption of Bitcoin as legal tender by El Salvador. This represents a significant step in the legitimisation of cryptocurrencies as money. Panama followed suit by also introducing a bill to make Bitcoin legal tender, with Paraguay, Ukraine and Cuba moving to legalise Bitcoin payments, and the leaders of other countries (Argentina, Brazil) praised El Salvador’s move.
Bitcoin – legal tender and safe haven asset
Cryptocurrencies, and Bitcoin in particular, have also been gaining market share as safe-haven assets. Since the beginning of the COVID crisis in March 2020, Bitcoin has outperformed gold tenfold. Although there are a number of factors behind Bitcoin’s 2021 performance, it was at least in part due to bitcoin’s growing acceptance as a store of value, in preference over gold.
As the leading cryptocurrencies exhibit strong store of value characteristics such as scarcity, divisibility, portability, storability, authenticity, and on many of these counts they perform better than gold (easier to divide, store and transport, and practically impossible to counterfeit), we expect to see their continued use as safe-haven assets.
Blockchain’s application layer takes off
Building on the stability and maturity of blockchain’s protocol layers, the application layer has started to take off. The first market segment to grow strongly in terms of the number of projects with real world use cases, users and transaction volumes has been decentralised finance (DeFi) since the summer of 2020. Since then, we have seen other types of applications also starting to take off, with gaming and the metaverse being the latest to exhibit exponential growth.
In addition to the proliferation of types of applications and numbers of projects, we also expect continued strong growth in users adopting these applications, translating into greater transaction volume on the underlying blockchain protocols, further increasing their value in the mid- to long-term.
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