Cryptocurrency’s volatility may ease this year

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The cryptocurrency market witnessed significant fluctuations in 2021. AFP
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  • Some experts believe that improved use and legality of cryptocurrencies will help reduce the wild swings in their prices
  • The Dubai World Trade Center has announced it would become a specialized area in encrypted assets, including digital assets

The cryptocurrency market witnessed significant volatility in 2021, soaring from US$ 29,000 at the start of the year to US$ 69,000 in November before falling to US$ 49,900 by the end of the year.

Despite unprecedented fluctuations and price drops, the cryptocurrency icon “Bitcoin” has maintained annual gains of over 70 percent, while Ethereum has beaten it to the punch, gaining more than 450% this year.

The five most significant stable coins: ether, UDS Coin, Binance USD, Terra USD, and Dai, achieved in 2021 a market capitalization of US$152bn. In contrast, the total value of all cryptocurrencies in circulation is more than US$ 2.2trn, with Bitcoin accounting for around US$ 920 billion.

Coin-stealing and restrictions

2021 had seen the continuation of China’s fruitless attempts to restrict cryptocurrency trading.  On the contrary, El Salvador was the first country in the world to accept and invest in Bitcoin, generating profits that were reinvested in the country’s schools and infrastructure this year.

On the other hand, as investors’ interest in cryptocurrency grows and billions of money are poured into its trading platforms, hackers’ and scammers’ appetites grow. This year has seen hacking and theft of bitcoin worth more than US$ 3 bn, as well as millions of additional unreported incidents. DEFI, or decentralized finance, accounts for 75 percent of all hacking in this field.

Also, this year, the SQUID GAME coin scam was a big hit and served as a warning to investors about the level of danger associated with digital currencies.

Binance will regulate cryptocurrency activities

Binance, the world’s most well-known cryptocurrency trading platform, has been pursued by financial regulators this year, with some prohibiting specific activity on the site and others advising consumers that it is not authorized to operate. In response, Changpeng Zhao, the platform’s CEO, stated that he wants to improve relations with regulators.

In line with this statement, the platform signed a collaboration agreement with the Dubai World Trade Center Authority, building a regulatory framework for crypto activities a few days ago, before the end of 2021.

The Dubai World Trade Center announced that it would become a specialized area in encrypted assets, including digital assets, their goods, digital exchanges, and operators. Binance stated that it seeks to create a regulatory framework that fits fast-paced and dynamic nature of digital assets.  

Overcoming the fluctuations

According to experts, the huge swings in cryptocurrency prices are expected to continue in 2022. The key to surviving these fluctuations is for investors to withstand and overcome the anticipated ups and downs.

“We’ve witnessed a correction in the market more than once,” said Anton Chachin, managing partner of Bifrost, a digital asset service provider. “If institutional investors begin to take profits, it might have a knock-on effect.”

However, he believes that giant corporations will continue to rush to Bitcoin as a potential hedge against inflation and rising interest rates, which might harm government-backed traditional currencies.

Some experts believe that improved use and legality of cryptocurrencies will help lessen volatility, noting that prices will continue to change dramatically. Still, extreme risks will be less severe than in recent years.

On the other hand, many analysts believe that more fund managers will be interested in cryptocurrencies as a natural extension of the so-called alternative investing arena, which includes gold and other precious metals in addition to stocks and bonds.

According to these analysts, Ethereum and Binance will continue to gain market share versus Bitcoin.

Another way that may lessen bitcoin volatility is to begin relying on digital currencies for purchasing and selling, as well as for employee compensation. Many businesses have used cryptocurrencies to ease payments, while others have used cryptocurrency to pay their employees’ salaries. Cryptocurrencies are also being used to pay athletes, artists, and musicians.

The future of digital currencies

Cryptocurrencies have attracted the attention of significant professional and institutional investors, including major fund managers.

Nick Elward, Senior Vice President and Head of Institutional Products and ETFs at a mutual fund company, said the next possible step would be to develop mutual funds for other currencies. According to CNN Business, “Ethereum mutual funds are projected to be available in early 2022.”

Experts believe that 2022 will be a milestone year for bitcoin, with the ups outweighing the downs. Cryptos may suffer in the early part of 2022 due to concerns over the overall macroeconomic environment, with Covid-related uncertainty and inflation being high and central banks unsure whether to be proactive in combating inflation or remain patient.

However, because crypto prices have become relatively cheap in recent weeks, the dip-buyers will be keen to take advantage of lower pricing due to the continued high demand for cryptos from consumers and institutions alike. While it is tough to predict when the tide will turn positive, the anticipation is that it will happen around the second quarter of 2022.

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