2022 is likely to be an interesting year for Bitcoin and the rest of the digital asset sector. Many of the economic factors that emerged in 2021 are likely to reverse this year. Some, however, are likely to persist. Here’s how these factors could impact Bitcoin’s price, adoption, and relevance in the new year.
Inflation
The cost of living is certainly higher in 2022. Everything from crude oil to lumber is rising in price, which is causing an unprecedented wave of inflation across the world. The U.S Federal Reserve recently reported annual inflation at 7% – the highest it’s been since the 1980s. There are growing concerns this inflationary wave could persist for much of this year if not a few years ahead.
To fulfill its role as ‘digital gold’ Bitcoin needs to act as an inflation hedge. However, the BTC-USD price is still trading close to the same level it was in January 2021 (~$41,000). That means the asset needs a sharp move upward to cover the drop in purchasing power of fiat currencies. Growing adoption could be the catalyst for that.
Adoption
If more institutional investors and nation-states consider adding Bitcoin to their coffers, the asset’s valuation could continue to surge this year. There are some signs that this is happening. The mayor of Rio de Janeiro, Brazil’s largest city, recently announced that 1% of the local government’s treasury reserves will soon be deployed into Bitcoin.
Meanwhile, Lord Fusitu’a of the island nation of Tonga says his country could adopt Bitcoin as legal tender by the end of the year. His government is set to introduce a bill modeled on El Salvador’s recent Bitcoin adoption legislation.
In order to fulfill its role as digital gold, Bitcoin needs to seep further into government treasuries and be used as a reserve asset. That trend could continue in 2022.
Mining
The mining hash rate hit a fresh all-time high recently driven by shutdowns in Kazakhstan and growing competition in the rest of the world. BTC’s market price has been trending lower in recent months, while the cost of energy has steadily risen. If these three trends continue, miners could see their margins squeezed in 2022.
Nevertheless, mining activity is likely to keep expanding as more players join the sector. This month, Block Chief Executive Officer Jack Dorsey confirmed that his FinTech giant had hired a team to develop a new Bitcoin mining system. We want to make mining more distributed and efficient in every way, from buying, to set up, to maintenance, to mining,” Thomas Templeton, Block’s general manager for hardware, said in a recent tweet.
The involvement of public companies in the mining process could reduce the flow of BTC into the open market. Since these companies can issue equity to raise funds instead of selling Bitcoin, the circulating supply could be reduced noticeably, pushing the price higher.
Price
PlanB’s stock-to-flow model predicted that Bitcoin would surge past the $100,000 threshold last year. It missed that target. That could either mean that the model is broken or just lagging behind. In 2022, we could find out how accurate and reliable this model really is. If BTC hits its target ($108,000 at the time of writing), the S2F model could become an industry standard.
