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Sunday, January 23, 2022

Year of Bitcoin: Here’s what made it the most popular cryptocurrency in 2021

As we near the end of this big year for cryptocurrencies, here we list all the important events that made Bitcoin the most popular asset globally.

Written by Mehab Qureshi | Pune |
Updated: December 31, 2021 9:20:34 am
Bitcoin took a hammering after the latest Chinese move, and is now down nearly 50% from it's all-time high.

The largest and oldest cryptocurrency, Bitcoin is making headlines, ranging from analyses of the digital currency’s future to people focusing on its massive electric power requirements and volatility.

2021 was a record-breaking year for Bitcoin, breaking its previous all-time high and adding roughly $545 billion to its market capitalisation. With crypto assets reaching new market price highs—the total crypto market capitalisation reached a record $3 trillion after recrossing $1 trillion in January and $2 trillion in May, according to a research by The Block.

As we near the end of 2021, here we list all the important events that made Bitcoin the most popular asset globally.

Elon Musk’s $1.5 billion investment

2021 kicked off with electric car maker Tesla CEO Elon Musk announcing that the company invested $1.5 billion in Bitcoin, making it the biggest investment by a mainstream corporation into the most popular cryptocurrency. In addition, the company also noted in a filing with the US Securities and Exchange Commission (SEC) that going ahead, it plans to start accepting the digital currency as a payment option for its products. Soon after Tesla’s announcement, the rate of Bitcoin skyrocketed to an all-time high, breaching the $44,000-mark for the first time.

The announcement of Tesla investing in Bitcoin even raised red-flags about Musk’s social media activity on cryptocurrencies. The moves raised immediate questions around CEO Musk’s behavior on Twitter, where he has been credited for increasing the prices of cryptocurrencies like Bitcoin and dogecoin by posting positive messages that have encouraged more people to buy the digital currencies.

Musk claims to be a posterchild of low-carbon technology. The electric carmaker’s backing of Bitcoin raised questions about his decision, as the annual carbon footprint of Bitcoins is almost equivalent to that of Mumbai, or to put it to a global perspective, as high as the carbon footprint of Slovakia.

Tesla immediately suspended the use of Bitcoin to purchase its vehicles because of climate concerns. Musk informed in a tweet reversing the company’s stance in the face of an outcry from some environmentalists and investors. Bitcoin, the world’s biggest digital currency, fell more than 7 per cent after the tweet and was trading at $52,669. Musk added that Tesla would not sell any Bitcoin, and intends to use Bitcoin for transactions as soon as mining transitions to more sustainable energy.

Global companies add Bitcoin to their reserves

After Tesla announced a $1.5 billion investment in Bitcoin, financial services companies such as payments player Mastercard and US-based lender Bank of New York Mellon also announced their intention of validating digital assets.

Nasdaq-listed Marathon Patent Group started the year off with a splash, buying $150 million worth of Bitcoin as part of the company’s treasury reserves in January.

Tesla aside, the first half of 2021 saw many companies make initial Bitcoin purchases.  Mastercard and BNY Mellon, microblogging site Twitter also added Bitcoin to its company reserves. Throughout the year, a number of well known companies purchased Bitcoin, including Square, which allocated roughly 5 per cent of its assets to Bitcoin.

Additionally, WeWork, Substack and insurance giant, AXA, began accepting payments in Bitcoin.

China’s crypto clampdown

2021 has proven to be an unusual year for Bitcoin mining. China’s central bank in September said all cryptocurrency-related transactions are illegal and must be banned, sending the strongest signal yet on its determination to crack down on the industry.

To understand China’s crypto clampdown, here’s a quick timeline of events.

On May 21, the Chinese central government published a memo that mentioned Bitcoin trading and mining crackdown. By June 9, power supplies for industrial-scale Bitcoin mining farms in Xinjiang’s Zhundong economic zone were ordered to shut down. Qinghai followed the lead and did the same. From June 18 to 26 bitcoin mining firms in Sichuan were ordered to shut down.

Chinese authorities believe cryptocurrencies disrupt economic order, and facilitate illegal asset transfers and money laundering. The authorities also blame cryptocurrency miners for energy waste to deadly coal mining accidents, and a potential threat to the country’s efforts to reduce carbon emission. The country aims to become carbon neutral by 2060.

It should be noted that Bitcoin mining requires high-powered computers that are competing to solve complex mathematical puzzles, in a process that makes intensive use of electricity. Interestingly, prices of mining rigs also tumbled after China imposed a ban—one crypto mining machine which sold around 4,000 yuan ($620) in April and May, could now be bought for as low as 700-800 yuan, as per a Reuters report.

China’s crypto crackdown, also affected the Bitcoin ecosystem as well as miners. Due to the cheap energy, low overhead cost and the proximity to major manufacturers, Bitcoin mining has been an activity dominated by investors in China—accounting for more than 75 per cent of Bitcoin mining, according to research published by the peer-reviewed journal Nature Communications in April. The country went from controlling up to 75 per cent of all Bitcoin mining in the world in April to not contributing to the industry at all as of July 2021.

As a result, Bitcoin’s hashrate significantly dropped making it difficult for miners to mine any Bitcoins. For the uninitiated, hashrate is a measure of the computational power required per second when mining cryptocurrency. To put it simply, it is the speed of mining. In the case of Bitcoin, the more mining is going on, the higher the hash rate. It should be noted that when the hash rate is faster, the chances of mining more Bitcoins per second increase.

According to Cambridge Bitcoin Electricity Consumption Index (CBECI), China’s global hashrate share was around 34.2 per cent in May of this year. And in 2019, the country accounted for about 75 per cent of the average monthly hashrate share — a significant portion of the world’s Bitcoin mining.

In October, the United States officially became the largest hub for Bitcoin mining operations and businesses. China’s crackdown created an opportunity for overseas bitcoin mining operations and has already led to an infrastructure boom in North America, Russia, Central Asia and Europe.

Regulators scrutinise Bitcoin

Regulators globally have been very active this year, with countries including China and Egypt, Iraq, Algeria banning Bitcoin, and regional financial regulators examining crypto-business with greater scrutiny in 2021.

This is also due to a potential fundraiser frenzy. According to a research by The Block, during the second half of 2021, at least 12 public and private mining companies went on a fundraiser frenzy, with each raising anywhere between $50 million to $650 million.

Another reason for an increased scrutiny was the amount of profits generated by Bitcoin miners. A total of $15.3 billion in revenue, representing a year-on-year increase of 206 per cent, as per ETC group. The increase can be attributed to the skyrocketing price of Bitcoin in 2021, reaching new highs.

Several banks in the US started accepting Bitcoin. Customers of some US banks are now able to buy, hold and sell Bitcoin through their existing accounts, according to crypto custody firm NYDIG. Banks are asking for Bitcoin because they can see their customers sending dollars to Coinbase and other crypto exchanges, according to Yan Zhao, president of NYDIG.

Meanwhile, In India, the government is set to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the winter session of Parliament. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

El Salvador recognises Bitcoin

El Salvador, a small coastal country in Central America, became the first in the world to make Bitcoin legal. The El Salvador Parliament approved the move by a supermajority of 62 out of 84. President Nayub Bukele of the country, said that Bitcoin will help increase financial inclusion in the country, where 70 per cent of the population does not have a bank account and relies on the informal economy.

On September 7, El Salvador launched the Chivo wallet the same day that the law went into effect. In the past few months, large banks and merchants within the country  have increased acceptance and credit functionalities leveraging the Chivo wallet.

The country has continued buying Bitcoin, with President Bukele often announcing purchases on Twitter.

Additionally, El Salvador is now planning to build an entire city based on the largest cryptocurrency Bitcoin. Bitcoin city, will be laid out in a circle (like a coin) and in the city center will be a plaza that will be host to a huge Bitcoin symbol, according to a report by Reuters.

The city will be built near the Conchagua volcano to take advantage of the country’s geothermal energy— to power both the city and cryptocurrency mining —an energy consuming process of solving complex mathematical calculations day and night to verify and add crypto coins to the Blockchain network.

It is worth noting that El Salvador is already running a pilot Bitcoin mining venture at another geothermal power plant beside the Tecapa volcano. According to Bukele, the residents of Bitcoin city won’t have to pay any income, property, capital gains or even payroll taxes. The city would be built with attracting foreign investment in mind.

Bitcoin preferred over digital gold

The cryptocurrency aficionados’ mantra that Bitcoin is equivalent to digital gold witnessed converts among the world’s biggest holders of the precious metal. In India, where households own more than 25,000 tonnes of gold, investments in crypto grew from about $200 million to nearly $40 billion in the past year, according to Chainalysis.

According to a new report by Crypto Research and Intelligence Business (CREBACO), so far around 15 million Indians have embraced crypto and invested close to 10 billion dollars in crypto assets.

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