Cryptocurrency in 2021: From Digital Curiosity to Serious Investment

28th February 2021

2021 sees cryptocurrencies maturing as a serious asset class. This article investigates how Bitcoin and other cryptocurrencies are influencing investment strategies and economic policies worldwide.

As the world heads further into 2021, one thing is abundantly clear: cryptocurrencies are no longer just a digital curiosity. Once viewed by many as speculative assets or, at best, a fascinating experiment in decentralised finance, cryptocurrencies like Bitcoin and Ethereum are now being recognised as serious players in the global financial system. Their rise over the past decade—from niche blockchain innovation to mainstream asset class—has been nothing short of meteoric. But as the value of digital currencies soars, so too does the debate surrounding their place in traditional investment portfolios and the broader economy.

Bitcoin, which first captured the public's attention in 2009, has led this digital revolution. Originally dismissed as a bubble by many, Bitcoin's steady climb toward recognition as a store of value has garnered the attention of institutional investors, hedge funds, and even publicly traded companies. This past year, Bitcoin has surged to record highs, with its price touching $60,000 in early 2021, marking a watershed moment in its maturation. For many, this dramatic rise signifies more than just a speculative boom; it is the realisation of the promise of digital currency as a viable, alternative asset class.

For some, the interest in Bitcoin and other cryptocurrencies stems from a growing distrust of traditional financial institutions. In the wake of the 2008 financial crisis, central banks and governments worldwide resorted to unprecedented monetary policies, including near-zero interest rates and massive government spending. The response to the economic fallout from the COVID-19 pandemic in 2020 only deepened this reliance on centralised control. Many cryptocurrency advocates argue that this reliance on central banks and fiat money exposes economies to inflationary pressures and the devaluation of currency, making digital currencies a safer, more decentralised store of wealth.

The shift from speculative asset to serious investment vehicle has been driven in large part by institutional involvement. Tesla's high-profile purchase of $1.5 billion in Bitcoin in February 2021 was a particularly noteworthy development. Not only did this move affirm Bitcoin's credibility in the eyes of institutional investors, but it also raised questions about the role of cryptocurrencies in corporate treasuries. While some have heralded this as a sign of growing mainstream adoption, others have raised concerns about the volatility of Bitcoin and its suitability for businesses looking for long-term stability.

In many ways, the rise of Bitcoin as an investment asset mirrors the broader economic shifts that have taken place in the wake of the financial crisis. As traditional investment vehicles like stocks and bonds offer lower returns in a low-interest-rate environment, investors have sought higher-yielding alternatives. Gold, long considered a safe haven during times of economic uncertainty, has been joined by digital assets in this role. Bitcoin, with its finite supply and decentralized nature, has been dubbed "digital gold" by many analysts, drawing parallels to the precious metal as a store of value.

Yet, just as with gold, there are critics who question the long-term viability of Bitcoin and other cryptocurrencies. The volatility of these assets, which can see significant swings in value over short periods, has led some to label them as speculative bubbles. Even Bitcoin, the most established cryptocurrency, is not immune to these fluctuations. In March 2020, as the world entered a global economic lockdown, Bitcoin's value plummeted alongside traditional financial markets. While it has since rebounded, its volatility remains a source of concern for many potential investors.

This volatility is compounded by the fact that cryptocurrencies remain largely unregulated in most countries, leading to concerns about their role in illicit activities and financial crimes. In addition, the environmental impact of cryptocurrency mining—particularly the energy-intensive process of mining Bitcoin—has come under increased scrutiny. Environmentalists have raised alarms about the carbon footprint associated with Bitcoin mining, which is powered largely by fossil fuels. The debate surrounding the environmental sustainability of cryptocurrencies has led some governments to consider stricter regulations or outright bans on mining activities.

It is in this context that the role of governments and central banks in shaping the future of cryptocurrencies comes into play. While some countries, such as Japan, have embraced the use of digital currencies and established regulatory frameworks to govern their use, others have remained more sceptical. In China, for example, the government has cracked down on cryptocurrency exchanges and initial coin offerings (ICOs), citing concerns about financial stability and capital flight. Meanwhile, in the United States, the Securities and Exchange Commission (SEC) has taken a more measured approach, seeking to regulate cryptocurrencies while allowing room for innovation in the market.

In addition to regulatory challenges, cryptocurrencies face significant hurdles in achieving mainstream adoption. One of the primary obstacles is the lack of widespread understanding and acceptance of digital currencies. For many, cryptocurrencies remain a mysterious and intimidating subject, their technical jargon and complex underlying technology creating a barrier to entry. Furthermore, while the number of businesses accepting cryptocurrencies as a form of payment has increased, they still represent a small fraction of the global economy.

And yet, the appeal of decentralised digital assets continues to grow. For some, the allure lies in the potential for cryptocurrencies to provide financial inclusion to the unbanked and underbanked populations around the world. In regions with limited access to traditional banking services, digital currencies offer a means of transacting without relying on intermediaries. For others, cryptocurrencies represent a form of financial freedom—a way to circumvent government controls, capital controls, and inflationary policies that erode the value of fiat currencies.

This theme of freedom and decentralisation is particularly resonant in the context of global political developments. In recent years, we have witnessed the rise of populist movements and the erosion of trust in traditional political institutions. In many ways, cryptocurrencies can be seen as a direct response to these shifts, offering an alternative to the traditional banking system that is often viewed as overly centralised and susceptible to political influence. Just as the characters in George Orwell’s 1984 seek to break free from the oppressive control of Big Brother, so too do cryptocurrency advocates seek to free themselves from the constraints of centralised financial systems.

At the same time, there are echoes of the themes of risk and reward found in works such as The Great Gatsby. In Fitzgerald’s classic, the pursuit of wealth and success is driven by a combination of ambition, hope, and, ultimately, illusion. The same could be said of the speculative frenzy surrounding cryptocurrencies, where investors chase the promise of enormous returns, often blinded by the allure of a future that may not materialise as expected. In both cases, the question remains: how much risk are we willing to take in pursuit of a dream?

As the cryptocurrency market matures in 2021, the question remains whether digital currencies can achieve widespread acceptance as a legitimate investment asset or whether they will remain on the fringes of the financial world. While the potential is undeniable, the challenges are significant. Regulatory uncertainty, technological hurdles, and environmental concerns all pose risks to the long-term viability of cryptocurrencies. Yet, for many investors, the rewards outweigh these risks, and the future of digital currencies looks brighter than ever.

In conclusion, cryptocurrencies have made remarkable strides in 2021, moving from the realm of speculative investment to serious financial asset. As we look to the future, the question of whether they will achieve mainstream adoption remains open. However, one thing is certain: digital currencies have changed the landscape of global finance, and their influence will only continue to grow in the years ahead.