introduction
Towards the top of 2022, traditional finance had two dominant perspectives on cryptoassets. Some saw Bitcoin and the like as merely a alternative for exposure to the high beta stock market. Others believed that FTX-related reputational damage had made the asset class toxic and uninvestable for the foreseeable future, if not without end.
But crypto’s performance in the primary half of 2023 has refuted each of those characterizations and revealed a resilient asset class.
Simplified narratives hide value
The correlation between Bitcoin and the S&P 500, NASDAQ and other stock market indices has finally shifted from positive to negative in 2023. This confirms what we should always have already known. Bitcoin and stocks are fundamentally different assets. Yes, each are influenced by central bank liquidity. But unlike stocks, Bitcoin is not as depending on the whims of the larger economy. There aren’t any dividend payments, income or returns, but fairly acts purely as a store of value and an alternate monetary system.
Therefore, perceiving Bitcoin as a high beta equity is overly simplistic and ignores its underlying value.
Bitcoin and stock markets usually are not correlated
Sources: Glassnode and Sound Money Capital
Cyclic cleansing cycle accomplished
The recent FTX-inspired crypto bear market served its purpose: driving out the speculative traders, liquidating leverage, and forcing weak miners to capitulate. As a result, long-term crypto investors consolidated their Bitcoin holdings. This isn’t bubble chasing or “dumb” money; These are investors who understand the technology and are less susceptible to panic selling.
The percentage of Bitcoin held by long-term investors tends to extend during bear markets in stocks
Sources: Glassnode and Sound Money Capital
This cleansing process is typical of Bitcoin bear markets. As speculators withdraw, the currency’s price movements might be driven by internal fundamentals fairly than global activity and risk appetite. This has helped break the correlation between Bitcoin and the stock market.
Allergic response? take a better look
The FTX debacle led many conventional investors and regulators to query the legitimacy of cryptocurrencies. Many long-time skeptics were convinced that vindication had finally come. But investment decisions should not be based on sentiment and perception – unless we use them as contrarian indicators.
Rather than triggering a crypto death spiral, FTX’s collapse triggered something of an allergic response within the investment world. This required evaluation and investigation, not knee-jerk reactions. Those who looked closely benefited, as Bitcoin has risen by greater than 80% since then.
In fact, Bitcoin, Ethereum and other decentralized applications have performed exceptionally well within the face of headwinds and extra regulatory challenges despite extreme volatility. Now even BlackRock is taking a better look.
BlackRock reduces reputational risk of crypto allocations
BlackRock’s recent SEC filing for a Bitcoin exchange-traded fund (ETF) shows that the cryptocurrency market shouldn’t be in retreat and that probably the most reputable investors are recognizing its potential. Regardless of whether approval is granted or not, the world’s largest asset manager is knocking on the SEC’s door. Sooner or later, a spot Bitcoin ETF will come to market and one other avenue for institutional crypto allocation will open up.
FTX cost many investors a whole lot of money and lots of VCs were burned by the experience. As a result, reputational risk has develop into a key motivator or demotivator in crypto-related investment decisions. The managers’ mindset was something along the lines of, “No one will take me seriously if I mention crypto.” I would even lose my job. It’s not definitely worth the risk.” But with BlackRock’s possible entry into the sector, that narrative may very well be reversed. Given the repute of the world’s largest asset manager, a fiduciary obligation to review an allocation could arise. Perhaps market participants can now deal with the use cases of cryptocurrencies as an alternative of the noise.
The use cases
As the crypto market burned off its speculative froth, the worth of those assets became apparent: Properly secured cryptoassets provide a hedge against the inherent challenges and inadequacies of the normal economic system.
During the 2022 banking crisis, for instance, many depositors faced the danger of just about complete lack of capital as banks struggled to cover their deposits. But such illiquidity risk is a continuing for traditional banks: they continually depend on central bank protection to counteract potential bank runs. Bitcoin holders usually are not.
Sudden dilution of value is one other threat embedded in traditional financial systems. A centralized authority can devalue a currency at any time. For example, to “solve” the 2023 banking crisis, the FDIC and the Federal Reserve intervened to boost insurance limits and guarantee all deposits. Such actions erode the worth of the dollar relative to real assets over time. In fact, the trend toward fiscal and monetary expansion in traditional financial markets may help explain Bitcoin’s remarkable 70% annual return since 2015.
The next phase of the crypto adoption cycle
Whatever the cryptocurrency narrative was after last yr’s bear market, the negative correlation between Bitcoin and stocks belies the notion that cryptocurrencies are nothing greater than high-beta equity exposure. The subsequent winning process throughout the crypto market has once more placed the deal with internal fundamentals.
However, as investors struggle to value cryptoassets and crypto technology on the whole, volatility is here to remain. The pace and exact direction of the crypto adoption cycle are uncertain and difficult to predict. Therefore, investors should heed the teachings of the last yr and look beyond the initial reactions and media reports and seek to know the underlying technology and its potential uses.
Next Bitcoin Halving: May 2024
Source: Sound Money Capital
BlackRock’s interest in a Bitcoin ETF shouldn’t be an outlier. The integration of crypto into conventional finance and portfolio allocation will only gain momentum in the approaching months and years.
There will all the time be skeptics. But given changing dynamics and greater institutional interest, the worth proposition is becoming increasingly clear. As Bitcoin’s supply growth halves in May 2024, a more exuberant phase of the crypto adoption cycle is prone to begin again.
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