The Last Look…

I have longed viewed bitcoin as something to trade – and little more. The evangelists will have you believe it is changing the world, to me it represents opportunities for those who wish to trade something with occasionally different drivers.

Over the weekend the chatter across social (and some mainstream) media went into high gear when bitcoin dropped 15%. Of course, few made the observation it pulled back to levels seen just three weeks ago, but either way the move was followed by a great tradition of the FX markets – analysts pontificating how it was “inevitable” that such a move was going to happen, even though none of them actually thought to predict it before it actually occurred! Equally, there were attempts to rationalise the move with citations of the US Treasury signalling a crackdown on crypto (nothing concrete emerged) and a power cut in the region of China most closely associated with bitcoin mining (which would make supply even tighter and see the price rise…?)

In some ways, it reflects the growing maturity of the crypto space that an increasing number of analysts are trying to overlay their economic and market ‘smarts’ to these products, however there is still the sense that the whole crypto industry needs to grow up a bit more. It will be interesting to see what impact, if any, this move has on those viewing crypto in the institutional space. On one hand they may see a 15% drop as an opportunity to dip the toe in the water and join the ranks of HODlers, on the other they may recoil further as such a move suggests liquidity levels couldn’t handle their flow should it come to market.

Inevitably, given the large drop happened over the weekend, questions are also being asked as to whether institutions will be happy investing in a market that stays open 24/7, especially when liquidity will be thinned out even further during that time? The lessons of history mean I am less concerned by that. Back in the 1980s two of the largest events in the FX market – the Plaza and Louvre Accords – happened at the weekend and were surprises for the size of moves they generated on Monday morning in Asia. In reality, bitcoin longs had more of a chance of rescuing something from the debris of a recently-established long, than the FX traders of the 80s did with the long, and then short, dollar positions wiped out by the politicians. Back then you have to wait until New Zealand opened on Monday morning, and liquidity still wasn’t that great!

There has been a lot of optimism recently over the institutionalisation of bitcoin as banks have leaked out their plans to offer services in this space, but it is important to note that, in initially at least, few are talking actually trading and investing in crypto. Rather they are intent on being brokers, much as they are in equities markets – they are happy to facilitate trade, which means their customers will have to want to trade it.

More than anything else, though, crypto now needs a flight to quality – as long as it can identify exactly what “quality” is

On this note, I was speaking with a senior US-based asset manager last week and we agreed that for bitcoin to become institutionalised, there would need to be more two-way interest because is it’s hard to properly trade an asset when the market behaves so differently depending upon its direction. With bitcoin the moves come sharply, especially on the downside, and more than anything else that is a liquidity issue and something asset managers are going to be wary of. In an already conservative industry, nobody wants to be the first to have to report underperformance because a crypto asset went south.

So to my point about the industry needing to grow up. What I mean is there needs to be the opportunity for two way interest – the market at the moment is too skewed, and it will remain so for as long as people equate the success of bitcoin with its price. The fact of the matter is, the technology behind bitcoin could revolutionise the world and as such it matters little whether the price is at $1 million or $1.

I also think crypto needs to be more focused – and it was interesting talking to someone in the institutional space recently who thought, as I do, that bitcoin isn’t the end game and that something else will supplant it in due course. While different cryptocurrencies have their own value proposition we don’t need too many, because already things are getting a little silly – just look at Dogecoin.

Something that was intended as a joke (and a rather good one I have to say) is currently being talked about in hushed tones in some quarters as a genuine opportunity for both investors and the world’s populace. Indeed, over the weekend Dogecoin rose, and it remains comfortably in the top 10 cryptocurrencies by market cap despite having no practical use (it is, however, backed by personalities like Elon Musk, Snoop Dogg and Gene Simmons – what could go wrong?)

For the crypto industry to take the next step and be adopted more broadly by institutions, the sense is it will have to trim some of the excess and take itself more seriously. A lot of the stuff on the periphery is fun, but it is perhaps holding back the more serious work of establishing digital assets markets and building sufficient confidence for institutional money to invest in them.

It’s going to continue to be a fun ride, but whether the destination is quite what the evangelists expect, I am less sure. The very fact that institutions prefer talking “digital assets” rather than crypto, tells me there is still quite a hill to climb. More than anything else, though, crypto now needs a flight to quality – as long as it can identify exactly what “quality” is.

colin@thefullfx.com

@colinlambertFX