It should come as no surprise that Bitcoin reached over $44K this week, more than double its price since March 13th. Going back to 2014, the cryptocurrency took an average of 9M and 21 days to double, while the doubling this time came 28 days earlier. What is slightly surprising is that BTC doubled without ever falling below its March 13 low.
-On average it’s down 27% between doubles (ie if it starts at $1K it drops to $730 before trading over $2K) and it’s down as much as 83% (trading at $170 before reaching $2K).
But this hardly even comes as a surprise to people watching Crypto trends. Volatility has actually steadily declined since the peak in the Covid era. Annualized volatility has been 50% over the past 2Y, no higher than many of the big tech stocks. What is interesting in this case is that the relative calm has come during a period of massive scandals, bankruptcies, prosecutions and regulatory battles in the crypto sector.
Does this mean that BTC could be invited to the table of the big players at this year’s holiday dinner to have its place in standard wallets?
For most investors, the answer is still no. BTC has more than enough upside potential to attract investors. Issues such as safe custody, tax treatment and legality appear to be largely resolved. But its correlations with other major assets — particularly stocks, currencies and gold — are volatile, making it difficult to fit into the portfolios of big-name players.
The original idea of BTC was as a transaction currency. It was far more efficient than the traditional financial system for international transfers, the unbanked and citizens of financially repressive regimes.
BTC is also proving convenient for perpetrators of crimes such as drug sales, prostitution and gambling. Despite popular myth, it is not a good currency for serious criminal activity such as terrorism or hit-and-run, as transactions are public and immutable. Granted, they’re also pseudonymous—you don’t have to use your real name—but investigators don’t have much trouble tracking individuals through flow patterns. Serious criminals do better with government-issued cash, assets like gold or diamonds, or privacy-protected cryptocurrencies like Monero or ZCash.
At the Senate Banking Committee hearings this week, Senator Elizabeth Warren agreed with JPMorgan CEO Jamie Dimon and other bankers that crypto money laundering controls need to be tightened. While laws can make it difficult to move traditional currencies into or out of crypto for criminal purposes, there is no way to prevent or track direct transfers within privacy-protected crypto, and financial crackdowns to combat money laundering are one of the things that getting people — both honest and dishonest — to use cryptocurrencies.
This does not matter for BTC as it is the currency of choice for transactions in criminal circles.. Radical improvements in traditional finance have been a factor as well as attacks by governments on the use of crypto for crimes they have generally overlooked. But the biggest reason was crypto innovations like Ripple or Nano which were much better transaction currencies. Around 2015 value case has shifted to the “Digital gold” argument. BTC will be an asset of value for crypto and used to transfer traditional currencies in and out of crypto, just as gold has been an asset of value for physical currencies for centuries, used to settle accounts between central banks.
From this point of view, the value of BTC depends on 3 things:
–the final value of crypto projects – mainly a technological risk investment; little actual income or profit in the physical currency.
–the value of the physical currency that is converted to and from crypto is subject to ups and downs, better known as Crypto Summer (increased interest and growth in crypto investments) and Crypto Winter (weak interest in cryptocurrencies).
–whether alternative means of providing a banking system for the crypto economy prove better -BTC has rapidly improved its connections to publicly traded futures and options, efficient borrowing and lending, safe custody and other aspects of a complex modern financial system. If the BTC sport ETF is approved by the SEC in January, as expected, that will improve things. Everything people do with stocks and bonds (investing, raising capital, hedging, speculating, trading) they will be able to do with BTC.
In comparison, Stable Coins have had minimal success. Only Eth among other cryptocurrencies has developed some kind of financial system of its own, lagging far behind BTC. Attempts by traditional financial institutions to use blockchain and other crypto technologies have also had limited success, but they have not threatened BTC hegemony. Some of the promising attempts to build financial services directly into the crypto industry, such as FTX and the Celsius Network, collapsed in 2022 and were all tarnished by the aftermath.
The market value of crypto projects depends on investor enthusiasm for tech ventures, which has a high correlation with tech stocks. But the enthusiasm to pour money into crypto often backfires, with disappointing tech returns sending optimists and risk-takers to crypto.
The recent BTC price doubling seems to be mostly related to an increase in regulatory clarity and tolerance, which does not seem to extend to Stable Coins. This increases both the efficiency of BTC’s financial and banking system and isolates it from competitors. Regulatory attitudes are mostly unrelated to asset prices.
With no apparent reasons for changes in crypto project successes or crypto trading enthusiasm on the horizon, the short-term outlook for Bitcoin seems to depend mostly on regulatory news, especially the approval of a spot Bitcoin ETF. Also, there is always the possibility of backtracking or bumps in the road, especially if there are new crypto scandals.
We are close to the time when even very traditional investors, generally skeptical of crypto, have to accept that low diversification in crypto is safer than none. There is still the risk of a crypto sector crash, but there is also enough potential for growth, so a lack of exposure indicates an unbalanced portfolio.
Dealer Aleks Angelov