I have been bearish on cryptocurrencies for a number of months now. I was feeling good about that view as Bitcoin flirted with breaking $6,000 again as recently as July 12th. Then it took off. It went from $6,185, to $6,662, to $7,314 in just 2 days (according to Bloomberg data).
That description doesn’t do justice to just how quickly it shot higher. According to Bloomberg data, Bitcoin was at $6,785 at 1:35 pm EST and got as high as $7,425 by 2:05 pm EST. A 10% move in half an hour is extreme, even by bitcoin standards.
I have seen many explanations for the move – but none are completely satisfactory. I continue to believe that liquidity remains low in many markets (already this year we have had moves in VIX that were considered nearly impossible and Italian 2-year bonds experienced what was at least a 10 standard deviation move). That low liquidity in an algo driven world has proven susceptible to rapid gaps in pricing, but Bitcoin and other cryptocurrencies have held their gains.
There are several things that drove the move in my opinion
- Several sources are reporting that the prestigious CFA designation will require knowledge about blockchain and crypto. In terms of ‘adoption’ it is impressive that this group, which has to be viewed as serious and conservative, has deemed crypto and blockchain important enough to add to their curriculum.
- More talk about banks looking at various crypto assets and, of course, Larry Fink told media that Blackrock is exploring blockchain and cyrptocurrencies. Markets seemed to ignore his comment that they have not seen large investor demand. I am not overly excited about big banks or investment firms exploring bitcoin or cryptocurrencies as they should make some investment in case it works out. I view this as less of an endorsement and just smart business sense for these companies to be prepared if it grows – rather than they are committed to helping crypto grow.
- It seems that the potential for a Bitcoin ETF has increased again. Whether it is the release of comments being sent to the SEC regarding bitcoin ETFs range from childish and absurd to extremely thoughtful and compelling (I thought that some letters that commented on the fact that GBTC – the Bitcoin Investment Trust – regularly trades at extreme premiums exhibits investor demand and that premium is a problem that would be corrected by a properly run ETF as most valid in trying to convince the SEC). I do think Bitcoin ETFs would encourage new adoption – anyone could buy a couple hundred shares – just in case. It would be a great way to alleviate FOMO (fear of missing out) or as I wrote long ago – it would help with the 5 Stages of Not Owning Bitcoin Grief that many felt late last year. Having said that, I think places like coinbase have made investing in Bitcoin and other cryptocurrencies directly, so much easier, that the benefit of an ETF might not be as great in terms of adding new buyers to the market as some seem to think. Open interest on bitcoin futures contracts remains unimpressive.
- Governments, central banks, supranational agencies are all getting more up to speed on crypto – which is clearly an indication of its importance, but I find most of the comments and statements more cautionary than endorsements – particularly of the current array of cryptocurrencies available (the sheer number of cryptocurrencies is somewhat daunting and to me, is one of their biggest weaknesses, because it does have a ‘me too’ or ‘anything goes’ type of vibe – rather than a perception that ‘this really works for what it is supposed to do’
I had the pleasure of sitting down with Mark Yusko of Morgan Creek a few weeks ago in Chapel Hill. We talked about many things, but one question he posed to me, that I’m still working on, is “What do you need to see to believe in the validity of a crypto fund”.
I don’t have a final answer, and am working on that more detailed report, but I will concede that seeing the scrutiny of the CFA brought to bear is a good thing, since if it can be endorsed by most with that designation, it would have to be considered appropriate for more portfolios (that remains a big if – it is a big leap from including material on tests, to actually believing it makes sense for your clients). A bitcoin ETF would help too, though I suspect that would be a “sell the news” type of event – but will that occur with Bitcoin at these levels? Higher Levels? Lower Levels? For the first time in months – my view that Bitcoin is headed back to $5,000 is shaken. I can’t recommend it yet, but there is a refreshed ‘buzz’ around crypto right now and that has always been a key precursor to further gains.