2021 was a ground-breaking year for crypto in terms of development, adoption and market capitalisation. With so much happening in the space, the crypto tax team at Tax On Chain look back on the last 12 months and picks out some of the key moments that defined 2021.
Tesla buys Bitcoin
Tesla buying $1.5 billion in Bitcoin in February was a monumental moment in crypto history as one of the largest companies in the world had now given Bitcoin its stamp of approval as a legitimate asset class. The decision was made in line with a change in their investment policy that allowed “more flexibility to further diversify and maximise returns”. Crypto sentiment reached euphoric levels as Bitcoin spiked 20% almost immediately after the announcement was made. In addition to buying Bitcoin, Tesla also announced it would start accepting Bitcoin as payment for its vehicles. This news was a milestone for Bitcoin as it further legitimised Bitcoin’s value propositions as both a medium of exchange and a store of value.
Ethereum layer 2 scaling solutions go live
2021 saw the deployment of the Ethereum Layer 2 (L2) ecosystem as more solutions launched throughout the year in a mission to help Ethereum scale and provide crypto participants with a better user experience. Thanks to L2s such as the Arbitrum, Optimism and Polygon networks, Ethereum users can use their favourite protocols without paying the high gas fees they’re used to on the Ethereum Mainnet (Layer 1). At time of writing, according to L2Beat.com, the Ethereum L2 ecosystem has already amassed $5.5 billion in Total Value Locked (TVL) and is continually growing. 2022 is shaping up to be a big year for L2s, with more protocols set to be deployed and centralised exchanges supporting L2 networks by providing users direct access into and out of the ecosystem.
Coinbase goes public
Coinbase, the largest cryptocurrency exchange in USA, created another landmark moment for crypto after the company went public via direct listing on the NASDAQ in April. It was the 7th biggest ever new listing in USA, recording a valuation of $85.7 billion after Coinbase’s earnings report presented some mouth-watering numbers. The lead up to the listing saw the crypto market heat up with Bitcoin marking a local top at $64,000, and crypto exchange-based tokens benefiting in price action from the Coinbase hype. This moment was again another example of crypto gaining further legitimacy as an asset class in the macroeconomy and provided more traditional investors a route to gain exposure to the crypto sector.
EIP1559 goes live
The much-anticipated Ethereum Improvement Proposal, EIP1559, went live as part of the London hard fork in August 2021. EIP1559 brought three main changes to the Ethereum blockchain including more reliable transaction inclusion, better transaction fee estimation and of course base fee burning. Since its implementation, over 1.2 million of ETH supply has been burned and removed from circulation. Fee burning coupled with Ethereum’s migration to a proof of stake consensus mechanism should see ETH turn deflationary in 2022.
El Salvador adopts Bitcoin
In September, El Salvador became the first country to make Bitcoin legal tender after the ‘Bitcoin Law’ was passed by the Legislative Assembly of El Salvador in June. In addition to introducing the new law, El Salvador purchased 400 Bitcoin and has ‘bought the dip’ on several occasions, bringing the country’s total holdings to over 1,200 Bitcoin today. The president of El Salvador, Nayib Bukele, later announced that the country would begin mining Bitcoin powered by renewable sources, using geothermal energy from its active volcanoes. Bukele also has plans to build a tax friendly ‘Bitcoin City’ at the base of a volcano that will be funded by Bitcoin sometime in the future.
China bans Bitcoin (again...)
For those who have been in crypto long enough, you have probably lost count of the times China has tried to ‘ban’ Bitcoin. However, despite the previous false alarms, in May, China who had accounted for up to 75% of Bitcoin mining, stamped out all Bitcoin related activity and successfully forced the shutdown of many Bitcoin miners in the country. The Bitcoin hashrate, a measure of the computational power required to mine the cryptocurrency, dropped 65% from its peak in May. Miners were forced to relocate their operations to crypto friendly locations abroad, and since then the Bitcoin hashrate has slowly recovered back to its levels before the ban.
October saw the long-awaited approval of Bitcoin’s first ETF in the US, the ProShares Bitcoin futures ETF ($BITO). The approval came 8 years after the Winklevoss twins filed the first ever application for a Bitcoin ETF back in 2013. Bitcoin and crypto has come a long way since those early days, and the approval of the first Bitcoin ETF opens the gate for future Bitcoin and Ethereum ETF approvals, which will allow a wider range of investors to gain exposure to the asset class.
ETH is money
For years advocates of Ethereum were laughed at for proposing that ETH is money. 2021 was the year that this thesis truly started to come to fruition as ETH became the base currency powering NFTs, the Metaverse and Web3. It wasn’t just crypto-centric platforms that found ETH being used as money, traditional auction houses, Sotheby’s and Christie’s, began denominating many of their incoming bids in ETH. ETH was listed among the world’s other major currencies during these live auctions and as a result, introduced a whole new demographic to Ethereum and crypto in general.
The year of NFTs and the Metaverse
2021 has undoubtedly been the year of NFTs and the Metaverse. It was long thought that DeFi would be the killer use-case that would bring mainstream adoption to crypto but as it turns out, NFTs were far overlooked and ended up onboarding more people into the space than any other sub-sector of crypto so far. The concept of NFTs seems to come intuitively to a younger generation of investors who see the value in verifiable ownership of digital items as they spend an increasing amount of time in a digital world. This momentum has been reflected in the price performance of many NFT and Metaverse tokens that have provided investors with staggering returns this year.
In August, VISA joined a long list of celebrities and brands that have invested into NFTs, with the acquisition of a CryptoPunk for $150,000. Cuy Sheffield, the Vice President of VISA, said the NFT acquisition was to signal their support for the people involved in the NFT market and predicts “NFTs will play an important role in the future of retail, social media, entertainment and commerce”. Two of the largest international auction houses, Sotheby’s and Christie’s, have also started including the sale of NFTs at their live auctions and have featured collections from the likes of CryptoPunks and My Curio Cards NFTs. Most notably was Beeple’s digital collage, Everydays: The First 5000 Days, selling for $69 million at a Christie’s auction, making Beeple one of the most valuable living artists today.
Another big theme within the Metaverse sector was the emergence of ‘Play to Earn’ games like Axie Infinity. Incredibly, 40% of Axie Infinity gamers are based in the Philippines, many of whom play the game to earn a living as rewards from the game far exceed wages paid for their physical labour in traditional jobs. The revenue these Play to Earn games generate are passed on to reward its users, unlike traditional ‘pay to play’ games where revenues flow to the gaming corporations instead. According to Token Terminal, Axie Infinity generated $1.3 billion in total revenue in 2021, the fourth most by a protocol only behind Filecoin, Uniswap and Ethereum. The impressive revenue earnings by Axie Infinity also translated to positive returns for investors of its token, AXS. AXS began the year at $0.51 and is now trading at $98 at time of writing, having peaked $164 earlier in November.
Finally, 2021 has seen the beginning of many major brands entering the Metaverse as the space becomes inevitably more popular. In June, Sotheby’s continued their involvement with NFTs by launching their own virtual gallery in Decentraland which showcases digital art pieces. More recently, Adidas acquired a plot of virtual land inside The Sandbox as it plans to continue experimenting with NFTs and the Metaverse. Perhaps the most notable brand entering the Metaverse in 2021 was Facebook, with its rebranding to ‘Meta’. Metaverse tokens such as Decentraland, The Sandbox and Somnium Space benefited handsomely from Facebook’s announcement as many regarded it as a major step forward in legitimising the concept of the Metaverse.
That's a wrap
2021 was a colossal year for crypto. There was good news, there was bad news and there was extreme price volatility, but, once you filter through all the noise, it's impossible to deny that development, innovation and adoption continues to increase at an exponential rate. This sector is still in its infancy and we are excited to see how the next few years unfold.
Written by Australian Crypto Tax Accountants: Rafael Franco & Oliver Woodbridge
Tags: cryptocurrency | crypto Australia | Ethereum | Bitcoin | NFTs | Metaverse