Crypto markets have historically been led by retail investors, followed by professional investors. Is it changing? After all, for the past 15 years, high-tech innovation has carried an opposite face and turned a business-led pattern into a consumer-led pattern.
The retail business was evident in the fourth quarter of 2017, as media hype rose sharply along with the price. There is no doubt that the retail hype is quieter this time around. CNBC had nearly 100 “bitcoin” headlines in the first half of Q4 2017. Over the past six weeks, as bitcoin ran to a new all-time high in market value, it was put up below 40. Where the hell is Davy Day Trader and the “Robinhood effect”
It is too early to diagnose a secular trend in crypto-investment, mainly because retail / institutional dichotomy is problematically simplified. Below, I run through four dimensions of the market that show how the participants in this startup behave differently than investors did in 2017:
- Bitcoin whales and trading versus possession
- Bitcoin vs. ether and everything else
- Regulated against offshore futures markets
- N. America vs. E. Asia investors
1. Bitcoin whales and trading versus possession
The number of addresses that have at least 1 bitcoin increased at a relentless pace from the end of 2013 to the crash in 2018. It picked up again in 2019, and then leveled out again in the spring. This is different from the end of 2017, when it rose to a peak with the bitcoin price.
Compare that to the number of what we might call bitcoin “billionaires”, addresses with at least 1,000 BTC. These whales sold in the startup in 2017. This time, Bitcoin blockchain’s Forbes list is growing and not shrinking.
Address balances should be taken with a grain of salt; addresses ≠ devices. Behavior is a better signal. If there are whales, where do they swim to? Wherever they overwinter, they take their bitcoin bags with them. The orange coin accumulates more in wallets that historically buy and hold, and less in wallets that have shown a tendency to trade.
Twice since 2017, a slowdown in the accumulation of holders has been a leading indicator of market peaks. In 2020, it does not yet show signs of declining.
2. Bitcoin vs. ether and everything else
The bull market in 2017 is remembered as a phenomenon driven by enthusiasm for initial coin offerings (ICOs) at Ethereum. But by the time the madness reached its fever level, ether (ETH) had largely completed its run. At the midpoint of Q4 2017, the bitcoin return was 23.9%; ether yield was 6.9%. It was bitcoin’s Q4 collection run that fed the bulls.
Contrast that with 2020, and the similarities and differences tell. Again, ether led the rise, but this time it keeps pace with bitcoin, returning so far 23.2% in the fourth quarter to bitcoins 28.4%, even before it crossed $ 500, early Friday. If the 2017 pattern is repeated, bitcoin bulls may have a longer range to run.
So are crypto markets consolidating? The answer is yes and no. Bitcoin dominance, the orange coin’s share of the cumulative market value, is in the high 50s. Usually, this means a shorter list of assets that make up the majority of the market. Not this year.
The top five assets in CoinDesk 20 are growing with bitcoin, but the long tail is now more fragmented than it has been since the wake of the 2017 bubble. (This number includes stack coins and other fixed assets.)
Regulated versus offshore futures markets
The chorus “institutions are here” can sing about the growth of the CME Bitcoin Futures market and signal the growing demand for regulated exposure to bitcoin through established operating channels. CME open interest rate hit $ 1 billion This week, a full-time high.
However, much of this growth can be attributed to the price run of bitcoin. And overall, easily regulated derivative contracts traded by individuals, supplies and liquidity providers regulate CME. It would be unwise to base an institutional flippening dissertation on growth in CME alone. Better to say that institutional participation is growing with the rest of the market.
4. N. America vs. E. Asia investors
In parallel with the growth of CME futures is the flow of bitcoin to North American exchanges and off East Asian exchanges.
To the extent that currency flows represent participants’ activity, East Asian investors have sold bitcoin to this bull market at rates never seen before. Meanwhile, North American interest in bitcoin is greater than it was in 2017.
An important caveat: the flow here represents traders ‘preferences more than investors’ long-term activity. The Stablecoin bond is at a pace to increase its market coverage by more than DKK 10 billion. $ This quarter. Some of the currents in East Asia are likely to represent Tether’s (USDT) march toward quote currency dominance, as traders increasingly favor it over bitcoin in crypto-to-crypto markets.
Takeaway: This bull run is actually different from 2017, though that does not mean we will not see another top-and-trough cycle. Signals suggesting the kind of investors participating indicate that we may be earlier in the cycle than we were when bitcoin hit its full-time high three years ago. Bitcoin’s history is full of tales of upcoming shifts or regulatory changes that will fundamentally change the market. These tales have been overblown in the past and they are probably overblown now. The same goes for tales that predict the death of the dollar.
Are traditional financial markets burning down their own frat house? Maybe, but it does not suddenly turn bitcoin into a safe haven or a hedge. The current patterns of new, larger and long-term investors’ growing engagement are likely to continue, but bitcoin and downmarket cryptocurrencies will be risky investments for the foreseeable future, and investors should continue to treat them as such.
Does anyone know what’s going on yet?
One of the things that makes bitcoin such a successful investment is the lack of infrastructure. Like most retail investors, I tend to take profits too early. Like many bitcoin investors, I keep my coins in cold storage, which means it takes time and effort to get them ready for trading. We bitcoin investors are akin to the apocryphal Fidelity clients who died and in death stopped shitting around with their portfolios and thereby became more successful than other Fidelity customers.
That said, bitcoin’s returns this month have put the orange coin in a stratospheric percentage of my family’s portfolio. Another one out there getting white bones, yet?
(Note: Nothing in this newsletter is investment advice. The author owns some bitcoin and ether.)
Rick Rieder, CIO for fixed income on Black stone, thinking of cryptocurrencies. If you yourself have lived under a cliff, Rieder made comments on CNBC on Friday morning, indicating that the world’s largest asset manager takes crypto seriously: “I think it is a sustainable mechanism that … can take the place of gold to a large extent? Yes, I do because it is so much more functional than carrying a gold bar around, ”said Rieder. REMOVE: If BlackRock goes the route Rieder speaks, we should all put on our running shoes to keep up.
IBM has secured a patent covering blockchain-based transactions in massively multiplayer online video games such as Fortnite and Call of Duty: Warzone. REMOVE: Blockchain startups in the gaming industry have touted similar technology as a way to ensure the player’s ownership of virtual goods and their portability between games, but it is unclear whether existing incentives for game development and release will support the move to such a structure. It’s doubly unclear how permissible blockages like the ones IBM has fought for would improve a simple database in these cases.
A potentially overlooked factor in the current bitcoin startup: Beijing’s breakdown of crypto trading tables that are not in hand, where miners convert newly minted bitcoin into cash. We broke it down into a new CoinDesk partnership with Axios, this week (check it out), after reporting the news on Monday. REMOVE: Bitcoin Halving in 2020 reduced the effect of new supply on the market. With more investors in possession, demand factors may be more of a driving force in this startup. This is more of a medium-term supply problem to monitor as it can shape the composition of bitcoin mining.
Brian Brooks, a former Coinbase Attorney General, has been given a nod in the White House to serve for a period of five years to head the office of the Currency Controller, the primary U.S. banking regulator. Brooks, who has served as acting Comptroller, has already overseen a public letter allowing nationally regulated banks to offer crypto storage and manage accounts for stablecoin issuers. REMOVE: Most of the air in crypto goes to regulators of securities and commodity markets. For the unregulated currencies that top the CoinDesk 20 list of cryptocurrencies, banking regulation may be more important as an enabling infrastructure that professional investors need to participate in.
Offshore crypto exchange operator Binance has sued Forbes and two of its journalists, who claim defamation over a story about the so-called “Tai Chi” documents, allegedly leaked from within Binance, describing a strategy for regulating misrepresentations in the United States REMOVE: CEO Changpeng “CZ” Zhao has been crazy about his company’s corporate structure and declined to say where Binance’s jurisdiction is located. It is a sign of the immaturity of the crypto infrastructure when one of the largest exchange operators does not tell you what law they operate under.
Goldman Sachs expects the digital yuan, China’s planned national virtual currency, to amount to 1.6 trillion rmb ($ 229 billion) in issuance and 19 trillion rmb ($ 2.7 trillion) in annual total payment value within 10 years. REMOVE: If you think PayPal moving to embrace bitcoin is exciting as a ramp to crypto, you have to be crazy about the possibility of central bank digital currencies (CBDCs). Their ability to be a gateway drug depends heavily on structure and regulation, but the potential is there.
In Japan, 30 companies have announced a partnership to issue a private digital yen and Mitsubishi UFJ Financial Group (MUFG), one of Japan’s largest banks, has announced plans to launch a blockchain payment network in 2021. REMOVE: This looks quite different from China’s digital yuan (see above), but both are examples of ways in which digital currencies can reach mainstream banking and its customers. East Asian economies are ahead of the United States and Europe in this. If you think that the US and EU adoption of this type of technology seems to be far-fetched, reflect that you probably said the same thing about texting in 2005.
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