Withnail and Is drug dealer Danny knew exactly when the 1960s were over. “They sell hippie wigs at Woolworths, man. The greatest decade in human history is over,” he laments in the cult classic.
On Tuesday, Coinbase hailed the “secular tailwind of crypto adoption among institutions.” But in a week of failing stablecoins, unexpected bankruptcy gossip, and widespread bloodbath, could that statement alone suggest that the glory days for digital assets are finally over?
Retail investors are no longer the dominant crypto trader. Most of the daily crypto trading volume comes from crypto institutions, much of which comes from trading among themselves. For example exchanges, custodians and crypto funds. Retailers dominated around four years ago when Bitcoin was trading below $10,000. We believe that the increased involvement of institutions that are sensitive to the availability of capital, and therefore interest rates, has contributed in part to the high correlation between Bitcoin and stocks
Chainanalysis very roughly estimates that institutional investors (anyone with more than $10 million to gamble) accounted for 44 percent of all crypto trading at the end of Q2 2021, up from 8 percent less than a year earlier.
Analysts at data provider VandaTrack point out that much of this interest is focused on Bitcoin and Ethereum:
customer interest [is] focused more on the two main crypto assets BTC and ETH. This is important because as more institutions await the first results of the White House executive order on crypto regulation (early June) and the ETH merger to ETH 2.0 (late summer), current price behavior will continue to be driven by TradFi assets ( i.e. tech). And as interest rate movements drive risky asset behavior, BTC and ETH will remain highly correlated high-beta plays on TradFi for the foreseeable future.
Bitcoin was intended to serve as a hedge against inflation, detached from central bank policy. Unfortunately, its seepage into the mainstream means it’s now behaving like any other risky asset.
Interestingly, Morgan Stanley believes that crypto is more sensitive to the money supply than changing interest rates. “Crypto prices surged in 2020 and 2021 as central banks increased fiat money supply,” the notes read. “Now the Fed is tightening, crypto and stock markets are correcting lower.”
Annual global money supply (M2) growth peaked in February 2021 and Bitcoin market cap growth peaked a month later in March 2021. The US Federal Reserve confirmed last week that it would hike rates further and begin reducing the size of its balance sheet in June, suggesting that the days of ample liquidity are truly over.
Speculative risky assets like cryptocurrencies were valued lower as their higher prices (compared to 2019) were justified by the extensive USD creation. The correlation between bitcoin and stock indices remains high and will continue to do so unless bitcoin becomes widely used as a means of payment – which is unlikely to happen anytime soon.
The bold section implies that cryptocurrencies — and stocks — may need to fall further once the Fed begins trimming its $9 trillion bond portfolio in June.
Analysts at JPMorgan last week estimated that bond yields need to rise another 200 basis points before the equity risk premium falls to pre-Lehman norms.
Bitcoin may be high at pixel time, but that doesn’t mean a bottom has been set. Camberwell carrot, anyone?
Source: Crypto News Austria