Thanks to the coronavirus pandemic, this hasn't been the easiest year. Nevertheless, as we get ready to turn the page on 2021, the cryptocurrency space stands out, once again, for its outperformance.
At the time of this writing (late evening, Dec. 27), the aggregate value of all digital currencies was $2.34 trillion. That's triple from where the crypto market began the year, and it's a considerably higher return than the benchmark S&P 500 in 2021 by a factor of seven.
The big question is: What's next for cryptocurrencies in 2022? Here are four predictions.
Shiba Inu-themed meme coins will implode
The prognostication I feel most confident about in the upcoming year is that the meme coins Shiba Inu (SHIB -1.19%), Dogecoin (DOGE -1.20%), and Floki Inu (FLOKI -3.72%) will absolutely implode.
Social media hype has made all three of these Shiba Inu-inspired coins hot commodities throughout 2021. At one point, Shiba Inu was higher by more than 121,000,000% on a year-to-date basis, with Dogecoin rallying to the tune of 27,000% between early November 2020 and early May 2021. Meanwhile, Floki Inu has offered more "modest" quadruple-digit gains this year.
But what these cryptocurrencies all have in common is a lack of competitive advantages and differentiation. For instance, Shiba Inu is nothing more than an ERC-20 token built on the Ethereum blockchain. This means it's subject to the same high transaction fees and processing lags that impact Ethereum's network. It's a similar story for Dogecoin, which has considerably higher transaction fees than most popular payment coins.
These meme coins also lack real-world utility. According to online business directory Cryptwerk, only 392 global merchants accept SHIB. What's more, crypto exchanges account for over 10% of this figure, which means even 392 is a generously high number for Shiba Inu. Floki Inu has equally poor real-world utility.
Even history suggests that hyped payment coins with massive short-term gains often undergo reversions ranging between 93% and 99%.
If there's a very clear theme for 2022 in the crypto space, it's to steer clear of hyped Shiba Inu-themed coins that offer nothing substantive.
The cryptocurrency market will undergo a sizable correction
With the cryptocurrency space primarily being driven by hope and expectation, rather than anything tangible, it would be wise for investors to expect a fairly big correction in 2022.
To begin with, history demonstrates that reversions are commonplace. The aggregate value of all digital currencies has catapulted higher by more than 1,500% in the past 21 months, yet we've not witnessed any sizable uptick in blockchain adoption or crypto payment use, outside of El Salvador giving Bitcoin (BTC -1.85%) the green light as legal tender.
To build on this point, the cryptocurrency market hasn't been able to decouple from the stock market during periods of volatility. Even though investors might view digital currencies as their own unique entities, or even as a hedge against the stock market, the data pretty clearly shows that when the stock market corrects lower, digital currencies follow. That's worrisome given that multiple factors suggest a double-digit percentage stock market correction could be on the horizon.
Investors should also be worried about the use of margin in the crypto space. With some crypto exchanges offering their clients up to 100 times leverage on their cash position, one quick move in the wrong direction could send margin calls rippling throughout the market.
Metaverse tokens will remain hot
If my arm were twisted and I had to choose one niche within the cryptocurrency market that'll remain hot, at least through the first half of 2022, it's anything having to do with the metaverse (i.e., the next iteration of the internet that'll allow users to interact with 3D environments).
The reality is that it's highly unlikely we're going to see significant monetization of the metaverse anytime soon. In fact, no one is even certain if the metaverse will be a corporate-driven project by the likes of Meta Platforms, or if virtual reality platforms built on a decentralized blockchain will dominate the landscape.
But the one thing that's clear is crypto investors are willing to chase tokens higher if it has anything to do with the metaverse. For instance, The Sandbox (SAND -2.53%) has skyrocketed almost 16,500% in 2021, with Decentraland (MANA -2.69%) jumping by "only" 4,300%.
What makes these projects so intriguing is that, unlike character and virtual-world creation and development in traditional games, users own the rights to digital plots of land within The Sandbox and Decentraland as non-fungible tokens (NFTs). NFTs can be used in these virtual worlds as a form of currency, or can be monetized in a platform's respective marketplace. This play-to-earn theme could be a driving force for SAND and MANA throughout 2022.
Bitcoin finds at least one new home
As noted, Bitcoin received a hearty boost in 2021 when El Salvador became the first country to roll it out as legal tender in September. The world's largest cryptocurrency by market cap has enjoyed a number of first-mover advantages over the past decade, but being recognized by any country as legal currency was a true first.
In 2022, it's quite likely we'll see at least one, if not more, countries experiment with Bitcoin as a legal form of currency. The reason is simple: Inflation is soaring in most countries worldwide. With governments around the globe printing money and enacting spending plans designed to keep their economies above water during the pandemic, the prices for goods and services are rising. Bitcoin, with its capped coin supply of 21 million, is viewed as a possible hedge against hyperinflation.
Furthermore, other nations will be able to use El Salvador as something of a blueprint when rolling out Bitcoin for themselves. While Bitcoin has been touted as a currency of the future, its rollout in El Salvador was plagued by technical glitches and numerous theft attempts. Other countries will be able to learn from El Salvador's mistakes, which could make them more confident in adopting the world's largest digital currency as legal tender.