Mon, 04/10/2023 - 07:30
Bitcoin's 2022 descent was almost as spectacular as its rise a year earlier. After tripling in value to reach a high of $64,440 in November 2021, it gradually slipped to a local low of $16,450 twelve months later. Amid the second round of lost fortunes, ensuing bankruptcies, and assorted scandals — FTX probably being the most notable — many pundits were quick to write off cryptocurrencies as still nothing but a speculative fool's errand. And don't even get them started on altcoins!
Fast forward just six months later, and it seems that many have since considerably changed their tunes. Since the lows of November 2022, Bitcoin has gained almost 80% and has now reached a goal of $30,000 at the time of writing (11/04/2023). But it's not just BTC that has had a solid Q1. Solana is also up over 100%, while Dogecoin and Ethereum have managed to gain around 50% over this same period. So, what's bringing the bulls out of hiding? And what might the future hold for digital assets and their investors?
Getting institutionalised
Perhaps the biggest shift in the digital currencies market of late has been the active adoption by institutional investors. Cryptocurrencies were previously viewed as an inherently volatile and uncorrelated asset class that had no place in serious portfolios, but all of that changed in the last 24-36 months. Back in 2020, annual institutional inflows into crypto stood at a respectable $6.8 billion, but just one year later, they had gained 36% to reach an unprecedented $9.3 billion. Even after the severe flight to safety in 2022, total crypto assets under management by institutions are still around $30 billion. A recent study by Fidelity Capital showed that nearly 80% of investment funds were "interested" in crypto, but of these, only 12% have held digital assets for two years or more.
Regulation is a major restricting factor for more conservative institutions, and with the PwC Crypto Regulation report stating that a majority of global regulators have either enacted regulatory schemes for dealing in digital assets or are on the brink of doing so, it's expected that this barrier will fall in 2023. Indeed, the data show that Bitcoin institutional inflows are once again positive after over a year of net outflows. Last week's $2.5 million BTC inflow might look modest, but this could be the turning point that signals the development of a bull market.
Risk appetite remains
In the wake of the Fed's aggressively hawkish policy to combat inflation, risk assets fell significantly as investors moved wealth to gold and the US dollar. However, the recent collapses of SVB and Signature, as well as the shotgun takeover of ailing Credit Suisse, have all forced the US regulator to put the brakes on its monetary tightening programme. Now, crypto might well be a difficult market to call, but if one clear pattern has been identified since the market's inception a decade ago, it's that digital assets do not perform well in a risk-off scenario. But the interest in major coins like Bitcoin, Solana and Ethereum is more than mere speculation. Since the arrival of serious institutional capital, Bitcoin and Ethereum are now genuinely viewed as stores of value and with prices at multi-year lows, it made sense for people to start buying in early 2023. Behind Solana's superior performance, meanwhile, is another factor altogether. Its rapid transaction speeds, immense scalability, and interoperability have made it an attractive investment ahead of the coming metaverse revolution. Of course, it is this more risk-friendly atmosphere that has facilitated investor activity. Whether we see a true bull market emerge will largely depend on if this sentiment is maintained for a reasonable length of time.
Fundamental volatility
Like any asset class, cryptocurrencies are also highly influenced by fundamentals. And the crypto news climate has been mixed, to say the least. This probably explains the rally-correction cycles we've seen since late 2022. One of the biggest sources of volatility this year has been the decision by the Commodity Futures Trading Commission (CFTC) to bring charges against Binance for breaching the law. Although BTC's price responded by dipping below $28,000, it soon recovered to regroup above $29,000 within just a few hours. While some see a case like this as a negative factor, others would consider it a step in the right direction when it comes to regulation and, hence, the lack of a clear, uniform response to the news.
Beyond Bitcoin, another huge development in the cryptosphere came from none other than Twitter's new owner, Elon Musk. The larger-than-life Tesla and SpaceX CEO moved markets as he changed Twitter's emblematic bird logo for the iconic Doge Shiba Inu dog. As one might expect, Dogecoin responded positively, gaining 25% in the space of just a day. Musk has long been a proponent of Dogecoin, and an almost cult of personality has developed around him among fans of the canine coin. Could this move be a cryptic hint that Dogecoin could become the official digital currency of Twitter? If so, this would obviously be very good for the memecoin's long-term prospects.
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