This article was written exclusively for Investing.com
- Cryptocurrencies are gaining acceptance as market caps within the asset class grow
- 2022 could be a breakout year for this asset class
- Solana: fifth leading cryptocurrency
- Cardano: 7th leading name in the asset class
- Invest only what you can afford to lose: SOL and ADA have liquidity to trade
When most market participants think of cryptocurrencies, it is the asset that dominates the conversation and analysis. As the grandmother of the asset class, Bitcoin’s rise has been incredible, rising from five cents a token in 2010 to nearly $70,000 in 2021, creating a speculative buying frenzy and fueling thousands of new cryptocurrencies onto the market. In 2021, the value of Bitcoin appreciated by 57.81%.
The index is the second most important cryptocurrency. It did even better than Bitcoin last year. Ethereum’s value soared 391.75% in 2021. Bitcoin is a medium of exchange, but Ethereum’s flexible platform has spawned many new cryptocurrencies, leading to outperformance.
As of early 2022, more than 16,650 tokens populate the asset class, with the number of new entrants increasing every day. and they are in the top ten, with a market capitalization greater than 99.9% of the rest of the asset class.
Cryptocurrencies gain acceptance as the market capitalization of the asset class grows.
In 2021, the market capitalization of the cryptocurrency asset class increased by 182.18% to $2.166 trillion on December 31, up from $767.482 million at the end of 2020.
The substantial increase in market capitalization was a function of increased usage of the burgeoning asset class. In 2021, more companies started accepting cryptocurrencies as payment vehicles. Furthermore, the speculative frenzy that has lifted values in recent years has continued to rise, pushing cryptocurrencies into mainstream investment assets, with financial institutions allowing clients to invest a percentage of portfolios in crypto assets.
High-profile support from Tesla CEO Elon Musk and Block’s CEO Jack Dorsey did not hurt the profile of cryptocurrencies. Even some top athletes and celebrities demanded cryptocurrency payments in 2021.
2022 could be the year of make or break
After hitting nearly $70,000 per token in mid-November, Bitcoin was trading below the $43,000 level on Jan. 11. Ethereum peaked at around $4,900 on Nov. 10, but was below $3,250 in early 2022.
Cryptocurrencies face bullish and bearish forces in 2022.
On the bullish side:
- Speculative frenzy likely to continue as token prices remain at levels that created fortunes
- The number of tokens keeps increasing. The demand for cryptocurrencies supports the growing number of options, as market participants search for the next token that offers rewards similar to those of Bitcoin or Ethereum.
- Cryptocurrencies have become more common investment vehicles, encouraging market participants to diversify their portfolios to include cryptocurrency exposure
- Faith in fiat currencies is waning, making crypto a viable alternative
On the bearish side:
- Regulators prepare to take on a larger role in market oversight to ‘protect the public’
- Governments will eventually deploy fiat digital currencies to compete with cryptocurrencies from a technology perspective
- Cryptocurrencies threaten legislators’ and government officials’ control over the money supply, which is not something governments are going to give up without epic courage. Money is a root of power, and many government officials see cryptocurrencies as a challenge to their control.
At around $2 trillion on Jan. 11, the cryptocurrency market capitalization is well below Apple (NASDAQ:), the world’s largest publicly traded company. At $2 trillion, cryptocurrencies do not pose a systemic risk to the financial system. However, if the market capitalization rises to 4 trillion, 5 trillion or more, governments are likely to get nervous and take action against cryptocurrencies. As hedge fund manager Ray Dalio said in 2021, governments have the power to “kill” the asset class, and the more successful they are, the more likely they are to “kill” cryptocurrencies.
Solana is the fifth leading cryptocurrency
On January 13, Solana was the fifth leading cryptocurrency. At $151.25 per token, SOL’s market capitalization stood at $47.4 billion.
Solana is a public blockchain platform that uses the proof-of-stake mechanism. Proof-of-stake protocols are a class of consensus mechanisms for blockchains that select validators in proportion to the amount and duration of their holdings in a cryptocurrency. Proof-of-work, the Bitcoin mechanism, consumes a lot of power, while proof-of-stake requires far fewer calculations and less power, making it a more environmentally friendly protocol.
Solana is a potential rival to Ethereum as it offers faster transaction speeds and lower associated costs.
SOL is another success story.
The chart shows that SOL tokens hit the market in September 2020 at the 78.0 cent level. They reached a high of $258.93 on November 5, 2021, a few days before Bitcoin and Ethereum hit their all-time highs. At $151.25 on Jan. 13, SOL was about 42% below its November high, falling more than Bitcoin and Ethereum, which were 38.2% and 34.2% below their respective highs.
Cardano: In seventh place
Cardano is a decentralized, open source public blockchain platform with a proof-of-stake protocol. Cardano has been around since 2015 and can facilitate transactions peer to peer with its cryptocurrency, ADA. Cardano’s energy efficiency makes it a greener cryptocurrency as mining does not consume a lot of energy.
ADA was the seventh leading cryptocurrency on January 13. At $1.30 per token, its market capitalization stood at $43.45 billion.
The chart illustrates that ADA started trading in October 2017 at 2.6 cents and rose to a high of $2.9634 on September 1, 2021. At $1.30, the price fell 56% from the high. In early November 2021, ADA hit a lower high of $2.2735, and has underperformed Bitcoin, Ethereum, and Solana since November.
Invest only what you can afford to lose: SOL and ADA are liquid for trading purposes
SOL and ADA are liquid cryptocurrencies that offer liquidity for traders with market caps on either side of the $40 billion level. However, the same risks that all cryptocurrencies face are inherent in SOL and ADA, and investors should only expose capital they are willing to lose, as the potential for substantial rewards comes with the risk of total loss.
Proof-of-stake protocol adopting a greener path for the environment will likely be a boon for the cryptocurrency asset class. However, the bull and bear cases for the asset class will determine the path of least resistance for prices in 2022.