Last week, Bloomberg publicized Cornerstone Macro LLC’s evaluation that investors that are ‘looking to counter the wild volatility of the stock market, can now consider the stabilizing influence of cryptocurrencies’. Here’s our thoughts on the significance of this trend and what lies ahead -
The market for Bitcoin (BTC) has been traditionally dominated by retail investors, as institutional flow broadly awaited further maturation across the digital asset spectrum. However, with watershed fiat printing from Central Banks and with no clear end in sight, paired with a lackluster stock market backdrop driven by the global pandemic, 2020 has seen a surge in institutions standing up and taking note of the asset class. Their increasing influence seems to be having a stabilizing effect, countering the volatile mood swings that BTC price movements have previously seen, the institutions are becoming the market’s matadors. Controlling the ebb and flow of animal spirits in the market and overseeing a more orderly price progression for BTC.
Institutional investors are beginning to recognize BTC’s properties as a non-deflationary asset and its historically low correlation to broader stock market activity, and are becoming enamored with the asset class.
“Cryptocurrencies have been on a tear this year amid increased institutional acceptance, interest from family offices and younger investors, as well as concerns about Covid-19’s effect on the global economy and on fiat currencies due to the stimulus flooding the system” asserted Joanna Ossinger of Bloomberg.
The Bull Run
As BTC rallied in October while equities slumped, some analysts asserted that BTC has decoupled from the stock market. The coin reached $13,800 in October, the highest it had seen since January 2018 before meeting resistance. In early November, it broke through that resistance and reached highs of more than $15,000, breaking records by staying there for more than 72 hours, visiting $16,000. Since then it has crossed into 19,000 territory and at the time of writing is flirting with hitting its All-Time High. In comparison to a volatile equities backdrop during the same period though, BTC has looked positively stable, and become increasingly hard for investors to ignore (see chart below).
The Benefits of “Conscious Uncoupling”
The jury is still out as to whether the current decoupling will endure into the long-term, but perhaps there is greater evidence that it might be. Research increasingly indicates that while digital currencies are traditionally seen as a volatile asset class, a portfolio combining investments in cryptocurrency and S&P stocks is safer than investing exclusively in equities. Thus, institutional players are becoming increasingly incentivized to amalgamate crypto as a portfolio hedge.
Key commentators including Mike Novogratz, the Galaxy Digital CEO who claims to hold more than 20 percent of his net worth in bitcoin, asserts that the current price rally is distinctly different from the retail-driven surge of 2017 and that this time momentum is institutionally led. Matt Blom, Global Head of Sales Trading at Diginex, concurs that strong institutional participation has been driving price action, highlighting the fact that this latest wave of Bitcoin price appreciation has occurred in tandem with comparably lower press coverage and google searches, which are hallmarks of surging retail interest.
Novogratz has further argued that the increasing recognition of BTC’s relevance as a store of value rather than a speculative vehicle amongst institutional capital is a cornerstone of its price surge. And he remains bullish, having declared on Twitter on November the 16th that he just upped his skin in the game, in anticipation of BTC’s potential to surge to “$60,000 by the end of 2021” as more institutional investors adopt the cryptocurrency.
Matt Blom also contends that we are reaching a pivotal moment for testing a new price range for the asset “If we can hold above the $18,265 level, then I can see room for the market to move to the upside…with the lure of the all-time high at $19,891 likely to spur another advance if the $19,050 level is broken.”
And Here Come the Other Matadors…
A succession of high-profile endorsements from institutional heavyweights of late have only bolstered BTC’s intrigue as a hedging mechanism. Bill Miller, the legendary investor from Miller Value Partners, enunciated the allure he sees for these investors in the “single best performing asset class” over the course of the last one-year, five-year, and ten-year periods. And underscored how its resilience “gets better every day”. Hedge-fund billionaire Paul Tudor Jones emphasized the prescience of BTC as “the best inflation trade” amidst unprecedented quantitative easing from the Federal Reserve, which he contends, is priming the global economy for inflation on a major scale.
Bitcoin’s rallies over the last two months come amid a number of other good news stories for crypto; Deutsche Bank has said Covid-19 has accelerated plans for central bank digital currencies (CBDCs), PayPal announced that it would allow its users to buy and spend using digital currencies, while JP Morgan suggested millennial investors are moving from gold to crypto as a store of value. All of this activity indicates that a corner is being turned in terms of mainstream adoption of digital currency.
If, as these moves suggest, digital currencies are adopted at a greater rate by both financial institutions and individual investors, greater stabilization in the market is likely. Crypto markets may decouple from the stock market in a more long-term and definitive way, further establishing the digital asset class as an essential portfolio diversification apparatus.
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