Macroeconomics of Bitcoin: What to Expect in 2022?
Like every currency, Bitcoin is affected by global economic events. In fact, due to its decentralization and globalized nature, Bitcoin is affected by the macroeconomics of different countries. In this article, we’ll cover the macroeconomics of Bitcoin for 2022, including events that might affect the performance of Bitcoin.
Index
Bitcoin as a Macro Investment in 2022
The Taproot Upgrade and Bitcoin
Government Policies and Bitcoin in 2022
The Russia-Ukraine War
The US Government and Bitcoin Adoption
Bitcoin Regulation? What to Expect
Countries likely to regulate Bitcoin
United States
Russia
Ukraine
United Kingdom
Netherlands
Slovenia
Bitcoin Mining regulation or ban in some countries
China’s Ban on Bitcoin Mining
United States and Bitcoin Mining
Kazakhstan
The EU stand on Bitcoin mining
Adoption of Bitcoin as Legal Tender
El Salvador
Other Countries to Adopt Bitcoin
The Future Outlook for Bitcoin in 2022: What to Expect
Bitcoin as a Macro investment
Bitcoin as a macro investment involves using Bitcoin as a store of value, so it is subjected to macro-economic factors. Here are some of the ways Bitcoin is affected by global events:
Weak Fiat Currencies (Inflation)
A significant reason behind using Bitcoin as a store of value is the resistance to inflation due to its fixed supply. As inflation continues to rise because of the increased supply of fiat currencies in many countries, the value of Bitcoin also increases to keep up.
Therefore, countries with a high level of inflation and weak fiat currencies experience an increase in the adoption of Bitcoin by investors. Investors, in this case, use Bitcoin as a macro investment to escape inflation. For example, Turkey and Nigeria experienced a surge in the Bitcoin adoption in 2021 due to the falling value of the Lira and Naira, even though there is a partial ban on cryptocurrencies in Nigeria. Even though Bitcoin has not yet proved to be a hedge against inflation on a macro level, it definitely acts as store of value on countries with hyper-inflation.
Expansion and Recession
Expansion and recession are also significant macro-economic factors that drive Bitcoin adoption. During periods of economic prosperity, people generally have more wealth to allocate to financial assets whereas recessions generally force people to use their money for immediate consumption. The March 2020 lockdown for instance, affected all financial markets including the Bitcoin market with over a 50% fall in price that month.
The Taproot Upgrade and Bitcoin in 2022
The recent Taproot upgrade is the most significant upgrade to the Bitcoin network in four years. The upgrade was completed last year, and it is set to improve the network’s privacy and efficiency. The upgrade combined with layer two scalability solutions like the Lightning Network, can significantly improve Bitcoin’s scalability. This strengthens the Bitcoin network and makes it easier to adopt for large-scale transactions.
Government Policies and Bitcoin in 2022
Russia-Ukraine War
The Russia–Ukraine war has been described as the largest invasion of a country by another country in Europe since World War II. Like the rest of the global market, the crypto market suffered a significant loss in the days following the first attack by Russia on Ukraine. Within hours of the invasions, Bitcoin dropped by almost 8%. However, cryptocurrencies have played other significant roles in the ongoing Russia – Ukraine war.
According to the CBNC, Ukraine raised $54 million in crypto donations in just a week. The Ukrainian prime minister, Mykhailo Fedorov, made a post for the donation on both Telegram and Twitter on February 26, 2022. Since then, at least 46,000 people have donated at least $100, with several people also making large donations. The FTX CEO, Sam Bankman-Fried, donated $280,000, and the Polkadot Founder, Gavin Wood, donated a $5.8 million grant to help the country.
Cryptocurrencies have been the easiest (and maybe the only way) for the Ukrainian government to accept donations easily from all around the world. The president, Volodymyr Zelenskyy, instituted martial law, suspending civil law immediately after the attack. Therefore, it has been almost impossible to send and receive fiat currencies. This event has portrayed cryptocurrencies in a good light, increasing their popularity and correcting the notion by people who have labeled Bitcoin as a tool for illegal activities in the past.
Crypto enthusiasts have taken the opportunity to explain the numerous benefits of crypto. One of them is this tweet by the popular crypto commentator Anthony Pompliano:
“This feels like a turning point for fiat currencies globally. A country currently engaged in violent combat to preserve its sovereignty and freedom is publicly soliciting bitcoin and crypto donations. Hard to imagine just a few years ago.”
The U.S. Government and Bitcoin Adoption
The United States president signed the Executive Order ensuring the responsible development of digital assets. According to the statement released by the White House briefing room:
“The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier but also has substantial implications for consumer protection, financial stability, national security and climate risk. The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system and the climate.”
The United States government is creating a system to harness the benefits of cryptocurrencies while also addressing the risk. The Executive Order sets out initiatives to explore and engage in constructive problem solving around known risks that exist with the legacy financial system and the new Web 3 world.
The official statement by the White House further explains:
“That is why today, President Biden will sign an Executive Order outlining the first-ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. The Order lays out a national policy for digital assets across six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion and responsible innovation.”
Bitcoin Regulation?
Currently, there is no international body regulating Bitcoin. According to a publication by the World Economic Forum’s Global Future Council on Cryptocurrencies:
“In the past, regulation of blockchain and cryptocurrencies has lagged behind, as regulators globally have found it difficult to regulate a technology that is borderless. To date, there has been no internationally coordinated regulation of blockchain and cryptocurrencies, though international bodies such as the Financial Action Task Force, Financial Stability Board, International Organization of Securities Commissions and Bank of International Settlements have been working towards international standards and guidance in service of this aim.”
Most central banks and regulators have their eyes on cryptocurrencies, with some central banks actively working to leverage crypto for their economic growth. For most countries, the objective of Bitcoin regulation is to:
- Protect their citizens.
- Prevent illegal financing.
- Protect the market integrity.
- Leverage the crypto market to stabilize their monetary systems.
The approach to Bitcoin regulation though differs from one country to another. For countries like India, the Central Bank simply amended existing law, while some countries like Liechtenstein designed a new model for regulating Bitcoin. Another approach is setting up a new regulators committee for dealing with the crypto industry. The UAE and European Union favor this approach. On the other corner, countries like China have decided to ban cryptocurrencies altogether, stating destabilization of the economy.
Countries Likely to Regulate Bitcoin in 2022
United States
The regulatory framework for Bitcoin regulation in the United States is under development. The Executive Order from the White House released in March 2022 provides guidelines for the different agencies and regulators. The Securities and Exchange Commission (SEC) is considered the most powerful Bitcoin regulator in the United States.
Bitcoin is also regulated by the Internal Revenue Service (IRS), The Commodity Futures Trading Commission (CFTC), Treasury FinCEN and the Federal Reserve Board. The Executive Order is expected to coordinate all the regulatory bodies while providing a regulatory framework for Bitcoin in the United States.
Russia
Russia is also working to create a comprehensive legal framework to regulate Bitcoin and other cryptocurrencies in the country. The Ministry of Finance has already proposed and submitted the bill for regulating crypto. However, earlier this year, the Bank of Russia proposed a blanket ban on crypto-related activities, including mining and trading.
Ukraine
Shortly before the war with Russia started this year, the Ukrainian parliament already adopted the law on virtual assets to regulate the crypto space in the country. The war has put a hold on civil law in the country currently but the government has been relying on cryptocurrencies to fund its defense in the ongoing war as previously mentioned.
Philippines and Vietnam
The Philippines and Vietnam are considering cryptocurrency-friendly regulations. The Vietnamese Prime Minister proposed a team that is conducting a detailed study on cryptocurrency so that the government can run its pilot program from 2021 to 2023.
United Kingdom
Bitcoin is mainly regulated by the U.K. Financial Conduct Authority (FCA), the bank of England and the H.M. Treasury in the United Kingdom. Crypto exchanges are expected to register with the FCA unless they have an e-money license. Furthermore, the FCA already created regulations to cover KYC, AML and CFT tailored for crypto assets.
In February 2022, the FCA and the U.K. government released a complementary reform proposal to include “qualifying crypto-assets” into the H.M. treasury. There are currently no specific tax law regulations on Bitcoin in the U.K. Bitcoins received as payment from an employer are treated as money worth, meaning they are taxed as income based on the value of the asset on receiving.
Netherlands
The Netherland government is an open supporter of Bitcoin, so it has been one of the hotspots for crypto lovers. Businesses can carry out transactions using digital currencies in exchange for products and services. The government is currently studying the impacts and opportunities around blockchain.
Slovenia
The Slovenian government has already unveiled its tax proposal on crypto redemption as part of its post-COVID recovery plan. The proposed plan goal is to help simplify and debureaucratize the country’s current system. The law also aims to improve Slovenia’s competitive position in the crypto market. According to a press release by the government, if the legislation is passed, it will be one of the few countries with such a simple taxation for digital currencies.
Bitcoin Mining regulation or ban in some countries
The regulation around Bitcoin mining varies from one country to another. While it is perfectly legal in most countries, few countries like China have completely banned Bitcoin mining stating misuse of electricity and high-energy consumption. On the other hand, governments like El Salvador and some States in USA are actively encouraging Bitcoin mining as an opportunity to tap into the booming industry or to control energy oversupply.
China’s Ban on Bitcoin Mining
China used to be the largest Bitcoin mining region globally, hosting almost half of the Bitcoin mining rigs. The government began cracking down on Bitcoin mining last year, beginning with strict restrictions on mining and finally a total ban on all mining activities in the country.
The primary reason stated by the government was shortage of electricity and the misuse of it. This decision came in shortly after there was a blackout in the most active mining region in China. It was widely assumed that crypto mining was to blame for the outage. The decision resulted in the mass relocation of miners from China to bitcoin-friendly areas like the United States, Russia and Kazakhstan.
United States and Bitcoin
The United States is the largest Bitcoin mining area in the world currently. Bitcoin mining regulation in the United States varies from one State to another but the rule of thumb is quite simple: if you can use and own Bitcoin in your State, you should be able to mine.
Bitcoin mining is legal almost everywhere in the United States except in Plattsburgh, New York where the city imposed a temporary ban on cryptocurrency mining. The U.S. Marine Corps has also banned crypto-mining apps from all government-issued devices.
States like Texas and Montana are actively involved in the Bitcoin mining scene with several government incentives to encourage miners to help tackle the energy oversupply problem. One of such incentives is the Texas Demand Response Contract between the Texas Power Grid and Bitcoin Miners.
Kazakhstan
Kazakhstan is one of the world’s mining-friendly regions and is currently the second-largest bitcoin mining community after the United States. The Kazakhstan government formally legalized Bitcoin mining in 2020 and the country’s tax code was also adjusted to allow the taxation of Bitcoin mining: the taxable amount is based on each miner’s energy consumption. However, the recent influx of miners from China has pushed the energy demand in Kazakhstan to the limit. Some players have suggested investing in new greener energy sources for the new industrial demand.
The European Union Stand on Bitcoin Mining
A few of the E.U. parliamentarians have been pushing to ban Proof-of-work (PoW) like Bitcoin mining over the past few months. However, Proof of Work won’t be banned in the European Union yet. The European Parliament Committee’s economic and monetary affairs voted down the bill earlier this month.
Instead, the committee voted for a uniform legal framework for cryptocurrencies in the European Union. To reduce the carbon footprint, the parliament proposed the European Commission to include crypto mining in the E.U. taxonomy for sustainable activities by 2025.
Adoption of Bitcoin as a Legal Tender
El Salvador
In June 2021, El Salvador’s president announced the law that adopted Bitcoin as legal tender from September 2021. Since its adoption, the country has procured at least $1,801 bitcoins, worth about 2% of its reserves. Also, in less than three weeks after the adoption, there were almost as many bitcoin users as bank users.
Although the president has come under serious fire from monetary organizations like the IMF to remove Bitcoin as legal tender, the decision is still firm. The country is currently working on issuing its Bitcoin bonds and building a Bitcoin city. The president plans to use the geothermal energy from volcanoes to power Bitcoin mining.
Other Countries to Adopt Bitcoin as Legal Tender
Several other countries might follow in El Salvador’s footsteps of adopting Bitcoin as legal tender, including Panama, Tanzania, Cuba, Mexico, Guatemala, Tonga and Malta. Ukraine might also join the countries adopting Bitcoin as legal tender this year.
The Future Outlook for Bitcoin in 2022: What to Expect
The crypto market saw a significant influx of new investors in 2021 and that is expected to continue in 2022 as blockchain solutions increase. Banking in Bitcoin is also expected to increase this year. The Bitcoin lending market will probably also grow as Bitcoin holders will have more use cases, protocols and yield options for using their bitcoins.