It would be easy to argue that 2021 was Bitcoin’s best year ever.
Bitcoin’s market capitalization grew by over $300 billion. Multiple senators — plus Chairmans of the Federal Reserve and SEC — confirmed that BTC is a commodity and they have no plans to ban it.
Bitcoin’s Lightning Network capacity tripled. Taproot activated smoothly. Multiple countries listed Bitcoin-based ETFs on major exchanges.
Institutional investors added BTC to their balance sheets. A country adopted it as legal tender.
Yup, here’s the top Bitcoin headlines for THE year.
Taproot adds privacy, efficiency, programmability
It took years of code review to prepare for Bitcoin’s smoothest and least contested soft fork. Bitcoin Core developer Greg Maxwell introduced Taproot in 2018.
Taproot bundled the activation of Bitcoin Improvement Proposals (BIPs) 340, 341, and 342. These BIPs delivered substantial improvements to Bitcoin’s privacy, scalability, and security.
Most notably, Taproot replaces Bitcoin’s Elliptic Curve Digital Signature Algorithm (ECDSA) with Schnorr Signatures.
- Bitcoin creator Satoshi Nakamoto initially used ECDSA because Schnorr Signatures creator Claus P. Schnorr protected that technology with a patent, which expired in 2018.
- Signatures provide a way to prove that an individual controls a specific private key without revealing their private key.
- Schnorr Signatures improve the security of signatures through an improved cryptographic algorithm.
The update also makes improvements to multi-signature and scripted transactions.
Before the Taproot update, multi-signature transactions contained unique code that blockchain analytics companies could detect.
Taproot makes multi-signature transactions look like standard blockchain data — enhancing privacy.
It reduces the amount of data that multi-signature transactions add to the blockchain. This improvement reduces congestion and fees, especially for senders of multi-signature transactions.
Taproot also adds a new type of Bitcoin address that starts with “bc1p,” replacing SegWit’s “bc1q” addresses.
Bitcoin activated Taproot on November 14, 2021 with block 709632.
Lightning Network triples its capacity
Bitcoin’s most popular Layer 2 protocol, Lightning, experienced significant growth in 2021.
The Lightning Network’s public capacity rose from 1,058 BTC on January 1 to 2,968 BTC on September 30, and now over 3,300 BTC.
Including non-public capacity at companies like Strike and Bitfinex, Lightning more than tripled in capacity this year.
Public analytics do not include private Lightning Network usage. In January 2020, BitMEX Research estimated that nearly 28% of payment channels might be private.
BitMEX Research based its estimation on analysis of 60,000 non-cooperative payment channel closures recorded on 1ml.com.
French Lightning company ACINQ could detect 17,110 Lightning Network nodes and 78,442 open payment channels as December 16.
For context, regular Bitcoin full nodes as of December 16 totalled 14,458 — so there’s now more Lightning Network nodes than full nodes.
SegWit, Bitcoin’s prior fee-shrinking upgrade, also reduced the file size of data written into new blocks.
Lightning Network accomplishes even greater, dual benefits by writing data to Bitcoin’s blockchain only twice (when opening and closing payment channels), consolidating thousands of transactions into just two’s worth of file size.
Indeed, 2021 was the year Lightning Network went mainstream, proving itself as an alternative to layer 1 transactions for small purchases like food and entertainment, even with its tradeoffs.
SEC allows first Bitcoin ETF on NYSE
Previously proposed Bitcoin ETFs would have conducted spot (actual) purchases of BTC. ProShares planned to deal exclusively in Bitcoin futures contracts that promised to settle in USD, as opposed to delivery of real crypto.
In a move that many view as a deferral to the Commodities Futures and Trading Commission (CFTC), the SEC finally to relented its seven-year denial of Bitcoin ETFs and accepted ProShares’ application.
Regulators rejected all Bitcoin ETF proposals prior to October this year. Gemini Exchange filed the first Bitcoin ETF application in July 2013.
Indeed, the SEC has developed a notorious record of reluctance to approve any ETF that trades Bitcoin on spot markets. It listed Bitcoin’s susceptibility to price manipulation as its primary concern, as well as lingering concerns around Tether.
However, in a June statement outlining the risks of trading BTC futures, the SEC stated the CFTC could regulate products that deal in digital asset futures.
It cited the CFTC’s authority to regulate commodity futures exchanges like the Chicago Mercantile Exchange where Bitcoin futures are listed.
Over the years, ETF sponsors offered a variety of solutions to the SEC for accurately pricing BTC and preventing market manipulation.
Some of them proposed storing BTC in a digital vault or using leverage. For nearly eight years, no one persuaded the SEC.
ProShares’ application defined its plan to trade in futures contracts rather than Bitcoin. The SEC consented. ProShares’ Bitcoin futures ETF began trading in October.
Investors can trade the ETF on the NYSE, although whether it’s a good deal for investors over simply buying Bitcoin is yet to be seen. Additional futures-based ETFs gained SEC acceptance after ProShares.
ProShares affiliate ProFund also launched a Bitcoin mutual fund in July 2021.
El Salvador makes Bitcoin legal tender
In September, El Salvador became the first nation to make Bitcoin legal tender. Its president Nayib Bukele promoted Bitcoin to attract foreign investment (the country’s 2020 GDP was just $24.6 billion).
Bukele praised Bitcoin’s promise of reducing international remittance fees. El Salvador’s government estimates that Salvadorans paid over $400 million in remittance fees during 2020.
Local merchants rushed to enable the acceptance of Bitcoin payments within the country. Coastal community El Zonte Beach became “Bitcoin Beach” after an elusive whale funded its initiative to become El Salvador’s first city to roll out full BTC adoption.
Mainstream economic experts and El Salvadorans expressed concern over the risky move. Their worries included the potential of increased money laundering and Bukele’s prior failure to eliminate gangs and street violence.
The Biden Administration also recently placed some of Bukele’s allies on a corruption watchlist.
El Salvador experienced issues with its flagship Chivo app, which is meant to serve as its official Bitcoin wallet. Bukele blamed major tech companies Apple, Google, and Hauwei for the delays in its release.
Chivo was built by outsourced Venezuelan and Argentinian development companies.
Nearly half of Salvadorans lack reliable internet access. Problems with Chivo slowed adoption, and identity theft during the initial rollout saw BTC stolen from some Salvadoran victims.
The IMF, El Salvador’s primary creditor, quickly raised its credit requirements of El Salvador. Not one to give up easily, Bukele soon announced the heavily indebted nation would build a so-called Bitcoin City (funded mostly by Tethers) in November.
He plans to fund the city with a “Bitcoin Bond” (again, funded mostly by Tethers) to raise as much as $1 billion. Bitcoin City will use approximately one half of the money raised during the first 10-year issuance to purchase BTC.
Bukele also says Bitcoin City will eliminate all taxes, except a variable Value-Added Tax (VAT), and receive geothermal power from a nearby volcano.
A presentation given by Blockstream chief strategy officer Samson Mow indicated that the controversial crypto exchange Bitfinex — which is under investigation by the US Department of Justice — will serve as the book runner for the bond.
Institutional investors begin to buy Bitcoin
Although institutions did not purchase a notable amount of Bitcoin this year, institutional investors certainly added BTC to their corporate balance sheets.
In April, Tesla chief Elon Musk sparked a rally after a regulatory filing revealed BTC on his company’s balance sheet.
Today, Tesla possesses about 43,200 BTC in custody at Coinbase, worth roughly $2.2 billion.
Other large holders include crypto exchanges that keep BTC on behalf of customers in omnibus wallets: Binance, Coinbase, OKEx, Huobi, Bitfinex, BitMEX, Poloniex, and many others.
- Michael Saylor’s MicroStrategy now owns over 122,477 BTC ($6.2 billion).
- Jack Dorsey’s Block (formerly Square) holds 8,027 BTC ($410 million)
- Bitcoin mining companies Marathon, Hut 8, Riot, Bitfarms, Argo, and Hive Blockchain collectively hold 22,197 BTC ($1.1 billion).
- Mike Novogratz’s Galaxy Digital owns 4,000 BTC ($204 million)
Trustees of formerly hacked crypto exchanges like Mt. Gox, CoinCheck, and Cryptopia also possess large amounts of Bitcoin.
Chamath Palihapitiya’s family office is also rumored to be one of the largest owners of BTC in the world.
Palihapitiya claims to have purchased 1 million BTC at $80 apiece and has avoided questions regarding his subsequent sales (although he’s recently stated he mostly owns Grayscale Bitcoin Trust shares).
His colleague Wences Casares at Xapo is also one of the world’s wealthiest Bitcoiners. Satoshi Nakamoto possesses the largest amount of any single entity: 1.1 million BTC ($56.2 billion).
Tesla briefly accepted Bitcoin for purchases of electric vehicles. By May, the company had suspended that payment option.
A few weeks later, Musk cited concerns about Bitcoin’s energy usage, diverting his fans’ attention to Dogecoin. Musk has offered to buy out major Dogecoin holders and change its fees to the lunar cycle.
In fact, Musk’s crypto activities for the rest of the year mostly involved pumping Dogecoin and other microcap crypto assets like CUMMIES.
Dogecoin holders since Musk’s SNL appearance have lost collectively over $60 billion in paper value.
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