Amidst turmoil, the promise of crypto currencies is unchanged
Bitcoin is down over 50% from its November all-time high while U.S. tech stocks have also tumbled, with Netflix leading the plunge, losing over 70% in stock price. At the same time, commodity and energy markets have entered a bull run. What is going on?
“The best way to understand what is happening in the crypto market is to look at the broader capital markets,” said Ben Zhou, co-founder and CEO of Bybit, a prominent cryptocurrency exchange.
“We are entering a risk-off environment due to rising interest rates in the U.S., UAE, and Europe, which have increased volatility in a number of asset classes.”
The Federal Reserve’s latest policy reversal of quantitative easing, or quantitative tightening, entails raising interest rates and reducing its balance sheet. This shift makes tech stocks like Apple and Google particularly vulnerable because it subjects their future earnings to higher risk.
Rates hikes increase the probability of stagflation (zero growth) or recession, which incentivizes investors to re-allocate capital into “defensive” positions such as precious metals, real estate, and cash. This flight of capital hits securities that trade on future growth the hardest.
For the past year or so, Bitcoin and the rest of crypto have been highly correlated with the NASDAQ and S&P 500, and have suffered as investors turned to safe-haven assets in the risk-off environment. However, this doesn’t mean that the rule books for stocks apply to Bitcoin, Ether, or other crypto assets.
Crypto is a different beast
Before 2020, Bitcoin and stock market movements showed a weaker correlation. This makes sense because Bitcoin is an asset with a hard cap of 21 million units, and it’s “mined” via a competitive system, as opposed to being issued by a centralized body. Furthermore, unlike large companies, it doesn’t have a CEO, quarterly earnings reports or management issues. As an entity, it’s more similar to gold with a high level of transparency in supply and demand.
Recently, however, Bitcoin and other crypto assets have gained wider acceptance as an asset class. Institutional investors, traders, family offices, and corporations have added crypto to their portfolios in an attempt to diversify into the future of finance, thus bridging crypto assets to equities as their investor groups increasingly overlap.
In addition, government regulation will continue to shape the future of the rising asset class, and while its full extent remains unknown, viewing Bitcoin as a risk-on asset does make some sense — for now.
It’s my personal view that Bitcoin, Ether and other crypto assets will decouple from wider equity markets as the general population better understand their functionality, what they offer, and how they can act as unique stores of value. And, when we have a full regulatory framework that covers the crypto asset class, we should see it decouple from traditional markets.
A Clear Vision
The creation of an entirely new asset class is a historic opportunity for investors, but the road to worldwide adoption is not without its challenges. Bitcoin moves cyclically, and throughout its history, its cycle has contained brave new highs and worrying lows.
We are now in crypto’s fifth bear market, and the critics have been quick to declare the death of Bitcoin — as they have 377 times before, according to the Bitcoin Is Dead database. There have also been two so-called bubbles that have burst in the past. On all occasions, Bitcoin and its cohort have risen again to become stronger and more valuable than before.
The current downturn is normal in the crypto market, just as it is with any market. If anything, Bitcoin has demonstrated more resilience in the current cycle and held the $30,000 line. The volatility in crypto is more pronounced, due to its smaller total market capitalization and its neophyte status, with the educational and regulatory issues that it entails.
But as the UAE has recently shown, sensible regulation that allows crypto builders and entrepreneurs the freedom to build a bigger and stronger crypto economy will help direct the industry to a fast track to recovery and more stability in the long run.
The market has also spoken. This week, Silicon Valley firm Andreessen Horowitz announced the largest crypto and blockchain fund of its kind at $4.5 billion to capitalize on the downturn. We will continue to build wealth for those who have the vision and conviction to stay the course.