- Bitcoin and equity markets are uncorrelated, debunking the notion that bitcoin is merely high beta equity exposure.
- The recent FTX-inspired crypto bear market served its purpose by flushing out speculative traders and strengthening the resolve of long-term crypto investors.
- The FTX collapse triggered an “allergic reaction” in the investment world, but deeper analysis has shown the resilience of bitcoin and other decentralized applications.
- BlackRock’s interest in a bitcoin ETF demonstrates the recognition of crypto’s potential and paves the way for institutional crypto allocation.
- Cryptoassets provide a hedge against the challenges and shortcomings of the conventional financial system, such as illiquidity risk and sudden value dilution.
- The next stage of the crypto-adoption cycle will likely commence after the next bitcoin halving in May 2024.
Traditional finance had two dominant perspectives on cryptoassets as 2022 drew to a close. Some saw bitcoin and the like as merely stand-ins for high beta equity market exposure. Others believed that FTX-related reputational damage had rendered the asset class toxic and uninvestable for the foreseeable future if not for all time.
But crypto’s performance in the first half of 2023 has proven the lie to both these characterizations and revealed an asset class with resilience.
The correlation between bitcoin and the S&P 500, NASDAQ, and other equity market indices has shifted conclusively from positive to negative in 2023. This confirms what we should have already known. Bitcoin and equities are fundamentally different assets. Yes, both are influenced by central bank liquidity. But unlike equities, bitcoin is not so dependent on the whims of the larger economy. It has no dividend payments, income, or yields but functions instead as a pure store of value and an alternative monetary system.
The recent FTX-inspired crypto bear market served its purpose: It flushed out the speculative traders, liquidated leverage, and forced the weak miners to capitulate. As a result, long-term crypto investors consolidated their bitcoin holdings. These are not bubble chasers or “dumb” money; they are investors who understand the technology and are less prone to panic selling.
The FTX debacle led many conventional investors and regulators to question crypto’s legitimacy. Many long-time skeptics were convinced that vindication had finally arrived. But investment decisions should not be based on sentiment and perception — unless we are using them as contra-indicators.
BlackRock’s recent SEC application for a bitcoin exchange-traded fund (ETF) demonstrates that the cryptocurrency market isn’t going anywhere and that the most prestigious investors recognize its potential. Whether it receives approval or not, the world’s largest asset manager is knocking on the SEC’s door. Sooner or later, a spot bitcoin ETF will launch and another avenue for institutional crypto allocation will open up.
FTX cost a lot of investors a lot of money, and many VCs were burned by the experience. As a result, reputational risk became a key motivator, or de-motivator, in crypto-related investment decisions. The thinking among managers went something along the lines of, “No one will take me seriously if I mention crypto. I could even lose my job. It isn’t worth the risk.” But with BlackRock’s potential entry into the sector, this narrative could reverse. Under the reputational cover of the world’s largest asset manager, a fiduciary obligation may emerge to consider allocation. Perhaps market participants can now focus on crypto’s use cases rather than the noise.
As the crypto market burned off its speculative froth, the value of these assets revealed itself: Properly secured cryptoassets provide a hedge against the inherent challenges and shortcomings of the conventional financial system.
Whatever the cryptocurrency narrative was following last year’s bear market, the negative correlation between bitcoin and equities debunks the premise that crypto is nothing more than high beta equity exposure. The subsequent winnowing process within the crypto market has renewed the focus on internal fundamentals.
BlackRock’s interest in a bitcoin ETF is not an outlier. Crypto’s integration into conventional finance and portfolio allocation will only gather speed in the months and years ahead.
There will always be skeptics. But amid changing dynamics and greater institutional interest, the value proposition is becoming clearer. As bitcoin’s supply growth is cut in half in May 2024, a more exuberant phase of the crypto adoption cycle will likely commence again.
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All posts are the opinion of the author(s). As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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