Is Crypto Momentum Building Further?

It has to be acknowledged that it doesn’t take a lot to get crypto enthusiasts excited, but even so, the past few weeks have seen what seems to many a ratcheting up of momentum behind the concept. From Elon Musk’s very public support for bitcoin (and it will be interesting to see if Tesla had already bought its $1.5 billion worth before his influential tweet – something for the authorities to ponder), through a series of announcements from banks that they were, in some way, rolling out, or investigating, crypto projects, crypto has been in the news.

The Full FX reported last week on BNY Mellon planning custody services and over the weekend several crypto publications seized upon a line in a World Economic Forum report, indicating that Deutsche Bank is lining up a crypto custody and prime brokerage solution. This was followed by CNBC saying that JP Morgan’s co-president, Joseph Pinto, had told the news outlet that the bank inevitably becomes “involved” if an asset class generates enough demand from customers. Pinto observed that crypto had not yet generated that level of support, but either way, one can add the US giant to those institutions studying the possibilities.

It’s not only the banks either, aside from Tesla, Blackrock recently added bitcoin futures to its approved investment list and Mastercard said it would support crypto transactions. With various investors increasingly seeing crypto as a natural investment destination in a zero interest rate environment, all the cards seem to be falling into place for 2021 to be the year that crypto “goes mainstream”. The price action in bitcoin and Ethereum would appear to back this up, both have rocketed to new highs with the former, at time of writing, eyeing the symbolic $50,000 mark (and by the time this is published could easily be $55,000 or $45,000!).

Of course, it would be churlish to observe that it would be typical of conservative institutional investors to finally buy in to a concept at the very time the rest of the world starts looking for a new ‘toy’ to play with – and in the crypto world there are plenty of opportunities for that, look at Dogecoin – but is that happening now?

A recent academic paper published in the Business & Economic Review studied an old theme, correlation or “spillover” between crypto and FX markets. The authors found there was little correlation between the two, citing previous research which found, “there is no evidence that macro-financial developments have any impact on Bitcoin prices in the long run.”

This makes the crypto world – if we haven’t worked out already – a very different beast, although there remain many, like this author, who view bitcoin in particular as just another instrument to trade.

Without doubt, a surge of institutional money would drive crypto prices higher, it was pointed out to me recently that if 5% of institutional money was invested in bitcoin, the price would probably increase five-fold from here, but should that be the measure of success of the project? After all, the initial intention was very much to create a payment mechanism that moved smoothly across borders and without interference from regulators. Not only is it becoming even more difficult to use bitcoin as a day-to-day “currency”, but the more success it attracts the more interested regulators become.

If a “green” cryptocurrency does become available, is it going to challenge bitcoin as the crypto destination of choice for institutional money?

Of course, the foreign exchange market offers a good example of how difficult global regulation is, but one does wonder whether governments the world over will put aside their differences in the interest of maintaining control of a phenomenon?

There is another issue that was pointed out to me about the institutionalisation of bitcoin – the ESG factor. Investor activism is on the rise, especially around human rights and the environment, so how will it sit with this increasingly influential body of investors if the companies or funds in which they have shares, start investing in something that is widely acknowledged to have the same energy consumption of a medium country?

It should be pointed out that plenty of shareholders currently accept investments in so-called “dirty” energy like coal, oil and gas, and there will be just as many willing to overlook the major cryptocurrencies’ lack of green credentials as long as the returns are good.

A growing number of investors will not accept this, however, which creates an interesting conundrum for crypto investment firms. Do they stick with the stellar returns on bitcoin, which will continue to rise as traders pile in, or do they consider another approach? As one example, Ethereum 2.0 may prove highly interesting to ESG conscious investors as it abandons the need for such heavy mining processes.

If indeed, a “green” cryptocurrency does become available, is it going to challenge bitcoin as the crypto destination of choice for institutional money? Or does the first mover advantage continue to work in the latter’s favour? If money does really talk then surely the weight of institutional money would win out, and the shift could be exacerbated by investors in bitcoin jumping ship to invest in the green alternative?

There are so many questions about how a shift will occur, but one thing seems clear – the momentum for something to happen is growing. It is interesting that a lot of institutions talk about “digital assets” and “crypto” rather than bitcoin, and this could be a sign that interest is being cast elsewhere. That would be ironic, because it would mean that at the very time the first mover is approaching a new peak, its future may be starting to be undermined (no pun intended!)

Either way, it is hard to see how bitcoin and crypto more generally remains true to its original ethos – “the man” is getting more involved and that inevitably means it taking over.