2021 Crypto Reflection
Key:
“Top Dogs” = BTC and ETH
All prices are in USD unless otherwise noted.
NFT - Non-fungible Token
Bitcoin - Scarce, Secure, Immutable,
Ethereum - Programmable (Turing Complete)
Composability - Interchangeable software pieces that can be combined in novel ways
As 2021 has come to a close, a bit of reflection is in store. To start out, I will examine the industry as a whole and the two “top dogs”, BTC and ETH. The thriving crypto ecosystem is booming. The total crypto market cap rose by nearly 270% closing the year with a total market cap of $2.1 Trillion. To gain some perspective, the S&P500 had a historically massive year with a return of 26.9%.
The two biggest crypto assets BTC and ETH rose substantially. BTC and ETH started 2021 at roughly $32,100, and $775 respectively. They each ended 2021 with a price of roughly $46,300 and $3,690 respectively. That represents a gain of 44% and 376% and has closed 2021 with market caps of $878 Billion and $440 Billion respectively.
Ethereum has been outpacing Bitcoin and it is widely believed that Ethereum will surpass Bitcoin’s market capitalization. (For you non-millennials out there, this potential phenomenon is known as “the flippening”). For context, the largest company at the close of 2021 was Apple (AAPL). Apple’s stock price rose an impressive 33% to end the year with a market cap just shy of 3 Trillion.
The Bitcoin Ecosystem / Global Adoption
Bitcoin continues to grow in popularity. Not only did a country, El Salvador, adopt BTC as legal tender but the number of companies and people who hold the asset continue to rise. In January 2022, there are over 40 Million Bitcoin wallet addresses with a non-zero balance.
It is not possible to say exactly how many people hold BTC, as one person can have many wallets. On the flip side, it is reasonable to argue that the number of people who hold BTC (including on exchanges) may actually be substantially higher than 40 Million when considering that large exchanges, such as Coinbase and Binance, hold large sums of BTC for its customers in a single wallet. That means that if Binance has only a handful of wallets, holding some in cold storage (aka offline) and some in hot wallets (aka online for faster access to funds), this actually represents all of its customer’s BTC assets held on its platform.
One way to look at the global adoption of BTC, the largest crypto asset, is to consider the number of users on the top exchanges. Coinbase has over 43 million users worldwide, while Binance has over 30 Million as of Early 2022. Of course, one can set up an account on each but it is a considerable hassle to go through KYC so it is fair to say that not everyone on Coinbase has a Binance account or vice versa.
So it is fair to say that the number of people who hold BTC is certainly in the tens of millions and growing every year. Did I mention that BTC only has 21 million coins that will ever be in circulation? The scarcity is a driving force behind the price movement.
One can easily extrapolate into the near future and say that the user base will grow. The quantity will remain the same. If demand increases and supply stays fixed, the price will rise. Yes, I hear your inner thoughts, “it is not a guarantee”, true. It is just the law of supply and demand. But wait, this is supposed to be a reflection, not a projection. Let's get back on track…
Ethereum’s Ecosystem:
Ethereum’s ecosystem is thriving. Billions of dollars are pouring into it. Ethereum, the token (ETH) is not the only representation of value in the ecosystem. In fact, some of the three most interesting Ethereum Improvement Proposals to date in my opinion are:
ERC-20 - Total > 485,000 (source: EtherScan.io - Jan 6th 2022.)
What is ERC-20? Simply put, it is a Fungible token standard on Ethereum. There are now hundreds of thousands of ERC-20 tokens available and that number appears to continue to grow. The two largest ERC-20 tokens, BNB and USDT are effectively a tie for a market cap at roughly $80,000,000,000 (80 Billion).
ERC 721 - Total > 29,000 (source: EtherScan.io - Jan 6th 2022) - NFTs
ERC 1155 - Total > 4,000 (source: EtherScan.io - Jan 6th 2022) - New standard for NFTs
Each ERC-20, ERC 721, and ERC 1155 token has its own value determined by a free market. Some of the largest projects attract tens of billions of dollars and NFTs are reshaping how artists own, monetize and prove ownership of their intellectual property. These three standards make it easy and streamlined for you, yes you, to get your project started, funded, and protected by the ever-growing EVM (Ethereum Virtual Machine).
Layer 2s - The current solutions for scaling “top dogs”.
Both Ethereum and Bitcoin have thriving Layer 2s that help the blockchains scale-up respectively. Bitcoin has the Lightning Network. Ethereum has several technologies and implementations of the technologies for layer 2 solutions. The Ethereum Layer 2 technologies include; Plasma, ZK Rollups, Optimistic Rollups, Validium.
Gas Fees -
To start, why are layer 2s necessary? In short, to scale the network and increase the amount of TPS (transactions per second) and reduce the fees associated with a transaction. At a high level, Layer 2s have been booming in popularity, especially on Ethereum where gas fees (fees to complete a transaction) have been prohibitively expensive.
Example: to buy a $5 NFT, one might pay a fee of around $50. As an analogy for those who are new to the industry; imagine you are buying $5 worth of Bananas. When you go to check out, the store will charge you a $50 fee at the cash register, for the privilege of using the cash register.
Gas fees represent the network demand. Rising gas prices mean that more people are trying to interact with the blockchain and therefore have to outbid each other to have their transactions included in the block (on the chain).
To wrap it up:
Both Top Dogs have seen a massive rise in value and users. Layer 2 solutions are increasing in number and popularity to meet the rising demand for using the technologies. The top dogs are not the only dogs in the park. There are many other projects on the rise including layer 1s, layer 2s that have not been mentioned here. The industry as a whole is rising and large investors (aka whales), institutions, and countries are starting to wrap their minds around decentralized ledgers and how it is a powerful robust, and trustless network that has yet to be killed by countless attempts by nation-states, hackers, and natural disasters. In short, the industry is here to stay and will likely pick up momentum, new users, companies, projects, investors, institutions, and countries in the coming months and years.
