Driving Factors Behind the Growth of Crypto Assets
The Crypto-Assets Activity around the World report released in March 2022 by the World Bank Group discusses how the adoption of various crypto assets has gained popularity globally.
According to a World Bank report released in March 2022, crypto assets are gaining prominence as stable digital alternatives to traditional currency. Investors now view cryptocurrencies as great tools for buying and selling goods, services, and financial products. Unlike the country-level macroeconomic developments, the number of crypto transactions across different nations is determined by regional factors like the US dollar's inflation expectations, gold and crypto-asset prices, and US bond yields. The crypto asset volume is higher in areas with increased access to technology, remittances, and international trade.
On a scale of one to ten, the global volume of cryptographically-secured transactive assets has seen an eleven-fold increase over the last decade. This growth is bolstered by both institutional and retail adoption across the globe. As a matter of fact, the crypto industry has grown significantly since the start of the Covid-19 pandemic. Besides, there is no substantial global financial condition behind it like in the past.
The crypto-asset industry is just getting started, and it comes with exciting potential opportunities. Whereas the crypto assets are diverse, they offer high rewards and a few risks as their downside. Of the thousands of crypto assets currently in existence, ether, bitcoin, and a small set of stablecoins have the lion's share of the trading volume. Yet, we shouldn't forget how Decentralised Finance (DeFi), an ecosystem relying on the distributed ledger, is catching up with major cryptocurrencies.
Crypto-assets are in a period of rapid growth and are increasingly diverse, unified, and complex. Understanding the main drivers behind their use is essential to people investing in the crypto-asset space and policymakers.
Although Bitcoin was meant to be a peer-to-peer electronic cash system that did not require a third party, like banks, stablecoins are not widely used as mediums of exchange. According to recent research by Graf Von Luckner et al. 2021, it is evident that the use of bitcoin for global payments and domestic transactions has been on the rise.
Similar research by Auer and Tercero Lucas 2021 shows that crypto investments offer high returns. It also states that although crypto assets are highly volatile, they're immune to excess inflation and macro-financial instability.
However, they're not immune to arbitrage issues that are considered illicit. Repressive state institutions or people afraid of their families can easily handle crypto due to their portability and ease of storage. With DeFi, the study concludes that it can overcome the inefficiency, poor interoperability, limited access, and opacity challenges often experienced in centralized and traditional financial divisions.
A new paper (Feyen et al., 2022) documents how crypto-assets are used globally by analyzing the amounts of money directly exchanged on each country's crypto-transaction ledger. It also examined how these amounts are influenced by global macroeconomic variables and domestic factors like political stability.
Though the international monetary fund 2021 database shows significant holes in crypto-asset information, it seems that different parts of the world are using crypto-assets in similar ways. As of 2021, an estimated 100 to 200 million individuals from different spheres of the globe, including in many EMDEs, had crypto assets.
The World Bank uses a global monthly country panel of on-chain value amounts sent in US dollars to investigate how crypto-assets could drive economic activity. It also analyzed the potential drivers of crypto-assets in various ways. This includes looking at how specific demographic characteristics, like gender and education, affect the use of different types of crypto-assets. Most of this data was obtained from cryptocurrency researcher Chainalysis. This sample covers 174 countries, one month per country, and 114 different crypto assets.
During the study, the crypto assets were grouped into four including:
Total crypto-asset volume traded over the past two years reached $2.8 trillion as of July 2021. It represents a surge from just under $1 trillion in early 2019. The volume of ether and stablecoins has outpaced that of bitcoin with time.