What. The. Hell.
This really has to be the hardest week to give an insightful update on since I started doing these newsletters. It’s not just the swirling threads of uncertain conclusions and shifting paradigms. It’s also the very loud background noise that isn’t background any more, and that makes choosing items to share with you particularly difficult. In a crescendo of chords and clashes, how do you select a few meaningful notes?
So, no apologies for what’s below, just… well, we’re learning together. Or maybe we’re unlearning.
Because this week was dominated by market moves, I’m changing the format just until we get through this. There’s the OMG section, in which I share news and insight pieces that leave us open-mouthed. And there’s the “life goes on” section, in which I remind you that projects are still building, adoption is still growing and firms are still trying to raise money.
To add to a week in which axes shifted, you’ll have seen CoinDesk’s decision to transform our flagship event Consensus, originally scheduled for May 13-15, into a virtual gathering. The circumstances are bad, no denying that, but we are getting excited about this. It will be different, I assure you – broader in scope, easier to access, a whole lot more innovative and free for attendees.
Lots to get to, so… take a deep breath, and read on.
- Noelle Acheson
(The song in this week’s subline. "We didn't start the fire, No we didn't light it, But we tried to fight it.")
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The Death of a Narrative
Listen. That whooshing sound you hear is not just the bitcoin price. It’s also the sound of the safe haven narrative flying out the window, probably for ever.
March 12 was not bitcoin’s worst 24-hour price crash ever. That honor belongs to April 11, 2013, when bitcoin fell by almost 50%.
Comparing the two crashes helps to understand what happened this week. It also helps to form a picture of what this sector could look like going forward.
For context, in April 2013 ethereum had not yet launched, Mt. Gox was the largest bitcoin exchange and the Harlem Shake meme dominated the internet. The previous month, the price ranged between $34 and $94, and the average transaction (according to Coin Metrics) was under $800.
Chinese demand powered the retail-driven market. Professional custody services were just warming up (BitGo, one of the first, was formed in 2013). Coinbase was less than a year old. BitMEX had not yet created the perpetual swap. Heck, CoinDesk didn’t even exist then (we started publishing the following month).
In 2013, bitcoin was the “asset of the future,” a decentralized representation of value, a protest against powerlessness and a way for savers to reduce their vulnerability to central bank action. Market participants believed in the story. By some accounts, the price started to rise along with international attention on the Cyprus banking crisis, in which a haircut was applied to all deposits over €100,000 at the two largest banks.
If you were a 2013 bitcoin investor and you time-travelled to now, you would not recognize the scene. Chinese demand has dissipated. Mt. Gox is a bitter memory. A lively derivatives market drives volumes. And big, incumbent financial institutions have set up digital asset desks. Really, you’d pinch yourself.
You might also be a bit alarmed. You’d love the legitimacy and the platform sophistication, and you’d get genuinely excited about all the smart people who have left their finance jobs to work in crypto. You’d almost certainly be stunned that the sector has evolved so quickly. And you’d be thrilled the institutions have taken an interest. Finally, professional traders have grasped the possibilities.
But you’d also wonder where the ideology went, where was the focus on empowerment rather than profits.
Crypto markets went and grew up. They substituted their hoodie for a button-down, and put on some big-boy shoes. They made new friends, became more responsible and entered a new world of risk.
To get a feel for how that risk has changed the sector, let’s look at the market behavior of the two crashes.
Back then most market participants were long. The absence of a liquid derivatives market made shorting relatively cumbersome and expensive. Trading was dominated by those that had taken the time to understand bitcoin, and they acted according to whether they thought it was over- or under-valued. The April 11 crash was triggered by profit taking – the price had more than tripled in the previous two weeks. It was a narrative-driven slump.
What’s more, it was isolated. That same week, the S&P 500 was largely flat, as was gold. It was entirely a bitcoin story.
Today the market is dominated by professional trading desks. They know about markets, and while many are probably attracted to the idea of a fiat alternative, their jobs are about playing numbers. For them, it’s not about bitcoin. It’s about volatility.
This week’s crash was a liquidity event, triggered by margin calls in crypto and other assets, and by a massive investor panic. This crash was about raising cash and covering liquidity. It had nothing to do with bitcoin itself.
Nor was it isolated – this week the S&P 500 suffered its worst 24-hour slump since 1987. Bitcoin’s story was not part of the activity this week. This week, bitcoin was just another financial asset getting trampled as investors headed for the exit.
That is why its safe haven narrative has died.
And that’s a good thing. Let’s look at why.
First, bitcoin was never a safe haven. Even before this week, it was just too volatile, young and untested for that role. In spite of the lack of logic, the narrative endured because so many wanted it to be true.
Now that we can put that legend to rest – an asset that can fall by over 40% intraday is unlikely to ever be taken seriously as a safe haven – more realistic expectations should emerge. This will support credibility amongst the investment community and perhaps give bitcoin a more justifiable role in portfolio management.
Also, this week has revealed that there is no such thing as a safe haven. Gold and T-bills, the assets the market traditionally turns to in times of turmoil, also fell, largely due to liquidity squeezes. Investors were scrambling to raise cash this week – but even that safe haven asset could come under strain as the global economy tips into recession and geopolitics adds tensions to monetary policy as well as faith in sovereign credit.
Yet portfolios need diversification – market assumptions may have been turned upside down and trust in correlations may take some time to recover, but the underlying math hasn’t changed. Even with investment principles in turmoil, the demand for alternative assets will not go away, and professional investors are already taking stock, adjusting objectives and rebalancing.
In a world worried about income, assets like bitcoin and gold that don’t depend on cash flows for their valuation are likely to occupy an increasingly important role in investment allocations as “alternative assets.”
The greater the range of alternative assets, the better for investors, especially in troubling times like these. Analysts and fund managers will be looking for opportunities to offset the upcoming shift in market fundamentals – many are likely to take a closer look at bitcoin, which does not depend on macroeconomic metrics.
In a market where relationships are broken and assumptions are smashed, an alternative asset – vulnerable as it may be to money flows – does start to take on an appealing narrative of its own, more innovative and more credible than that of the safe haven.
With this, the integration into traditional finance that we wanted for bitcoin can do so much more than make it vulnerable to the ravages of global sentiment. It can also finally bring it the opportunity it deserves.
Disclosure: Nothing in this newsletter should be taken as investment advice. The author is a long-term holder of a small amount of bitcoin and ether. Her opinions are her own and do not necessarily reflect those of CoinDesk.
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OMG
Ether’s price drop revealed potential fault lines in decentralized finance (DeFi) applications built on top of ethereum, triggering massive liquidations across the sector. TAKEAWAY: You know the adage that to really understand how something works, you have to break it ? DeFí has risks and some dubious business models, and the fractures provoked by this week’s markets will probably winnow out some of the weaker ones – but others are likely to become stronger as they mend vulnerabilities and show that they can withstand testing times. The premise of decentralized finance deserves some skepticism, but after this week we can’t deny that centralized finance also has many weak points.
The liquidations were not just confined to DeFi platforms – my colleague Nathan DiCamillo spoke to the heads of the main centralized crypto lending platforms to see how they were weathering the storm. TAKEAWAY: The strategies range from raising collateral requirements and interest rates, to freezing new loans and delaying product launches. All sounded confident but also cautious, which taken at face value is a relief – a major lender collapsing would be very bad for the sector, not just for the collateral flooding the system but also for the blow to overall crypto confidence.
A survey conducted by cryptocurrency investment firm iTrustCapital asked investors which asset they thought would do best in a global pandemic. It was not bitcoin. It was not gold. It was cash. TAKEAWAY: And then theory met reality.
Bitcoin options trading volume has surged since the beginning of March, with major exchanges registering all-time highs. TAKEAWAY: On Thursday, they surged even more, blowing all previous records out of the water. Open interest, on the other hand, plunged, indicating a withdrawal of liquidity and hinting that much of the volume was traders closing out their positions.
It’s not just bitcoin’s narrative that is changing – all other asset class narratives are, too. TAKEAWAY: I wrote this for the newsletter last week, before things went even more haywire on Monday. And I seem to have written about narratives again this week (see THE BRIEFING above). The new narrative is about new narratives. I think I’ll sit down now.
LIFE GOES ON
Jeff Dorman, CIO of Arca Funds, reminds us that shares have been around for hundreds of years, but the concept of calculating “intrinsic value” is only about 100 years hold – so those that complain that bitcoin has no “intrinsic value” should give crypto a break, it’s getting there. TAKEAWAY: Graham and Dodd’s breakthrough changed the way we look at investing. So will the new concepts introduced by the attempt to value crypto assets. We’re just warming up.
Building and testing of the Eth 2.0 network – the upcoming shift of ethereum from a proof-of-work protocol to a supposedly more efficient proof-of-stake – is continuing apace and reaching milestones. TAKEAWAY: Ethereum had its worst day ever on Thursday, which may derail some development groups that relied on their coin treasuries for funding. But the developer community is diversified enough to ensure that at least some work will continue, keeping progress moving forward while we wait for markets to recover.
At a crypto conference in London this week (yes, you read that right), Boerse Stuttgart’s chief digital officer said that Europe’s new anti-money laundering directive (AMLD5, implemented at the beginning of the year) has attracted traditional financial institutions into cryptocurrencies. TAKEAWAY: In Europe, banks and other financial institutions can already custody and trade crypto assets, but relatively few do so. Clearer rules could encourage even more to explore this option and expand their services, although to be honest I don’t expect many of the incumbents to be eager to branch out into new (and potentially risky) business lines when they are all bracing for a slew of defaults.
Small-scale traders across the Middle East say that interest in bitcoin as a safe-haven asset, not a speculative asset, is stronger than ever. TAKEAWAY: Yes, I know I said up above in THE BRIEFING that the safe haven narrative was now officially dead – but this is a different kind of safe haven, the kind that is less about relative price performance and more about economic survival.
Crypto exchange Kraken has said that it is planning to reopen services in India, after the country's Supreme Court overturned a two-year banking ban for cryptocurrency firms last week. TAKEAWAY: In last week’s newsletter I talked about what a potentially huge impact the growth of crypto exchanges in India could have on the overall market, given the size of the population. A mitigating factor, however, is the restrictions on retail FX trading – it’s unlikely the regulator will take a softer approach to retail crypto trading.
My colleague Leigh Cuen interviewed YouTube influencer Michelle Phan about her pivot from makeup to bitcoin, and how she is investing in educating her audience about protecting their purchasing power. TAKEAWAY: With so much bad news out there, this is a refreshing reminder that bitcoin’s potential audience is much more diverse than many realize, and that crypto education is still largely grass roots but sometimes has a bit of gloss.
Gibraltar-based derivatives exchange Quedex has launched a December 2021 bitcoin futures contract, the longest expiration date in crypto. TAKEAWAY: I’ll just say it, kudos to investors this brave in these markets.
Figure Technologies has completed a long-awaited $150 million securitization of a bundle of home equity lines of credit (HELOCs), billed as the first such transaction in which all aspects of the process were managed on a blockchain. TAKEAWAY: HELOCs have apparently been declining in popularity , but could see an uptick as rates continue to fall. Maybe putting them on a blockchain will make them cheaper to administer? Not sure how that will boost demand, though.
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| February's CoinDesk Monthly Review is out! It covers the topics of cash onramps, DeFi growth and the upcoming halving, and distills them into a narrative that speaks to evolving use-cases. You can download it here.
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Institutional Crypto - We didn't start the fire