Did institutional investors crash the crypto party?
Withnail and meDrug dealer Danny knew exactly when the 1960s were over. “They sell hippie wigs at Woolworths, man. The greatest decade in human history is over,” he laments in the cult classic.
On Tuesday, Coinbase hailed the “secular tailwind in crypto adoption among institutions.” But in a week of faulty stablecoins, unexpected bankruptcy chatter, and widespread carnage, could this statement alone signal that the glory days of digital assets are well and truly over?
From Morgan Stanley:
Retail investors are no longer the dominant crypto trader. The largest proportion of daily crypto trading volumes comes from crypto institutions, a large portion of which comes from trading between them. For example, exchanges, custodians, and crypto funds. Retail traders dominated about four years ago when bitcoin traded below $10,000. We believe that the increased involvement of institutions, which are sensitive to the availability of capital and therefore interest rates, has contributed in part to the strong correlation between bitcoin and equities.
Chainanalysis very roughly estimates that institutional investors (anyone with more than $10 million to play with) accounted for 44% of total crypto exchanges at the end of Q2 2021, down 8% from a year ago. .
Analysts at data provider VandaTrack point out that much of this interest is centered on Bitcoin and Ethereum:
Interest of customers [is] focused more heavily on the two major crypto assets, BTC and ETH. This matters because, as more and more institutions await the first results of the White House Executive Order on Crypto Regulation (early June) and the merger of ETH with ETH 2.0 (end of summer), current price behavior will continue to be determined by TradFi (i.e. Tech) assets. And as rate moves drive risky asset behavior, BTC and ETH will remain highly correlated, high beta plays on TradFi in the near term.
Bitcoin was meant to serve as an inflation hedge, unrelated to central bank policy. Alas, its infiltration into the mainstream means it now behaves like any other risky asset.
Interestingly, Morgan Stanley believes that crypto is more sensitive to the money supply than to changes in interest rates. “Crypto prices rose in 2020 and 2021 due to increased fiat money supply by central banks,” the bank notes. “Now the Fed is tightening, crypto and equity markets are correcting lower.”
Annual global money supply (M2) growth peaked in February 2021, and bitcoin market capitalization growth peaked a month later in March 2021. The U.S. Federal Reserve confirmed last week that it would raise rates further and begin shrinking the size of its balance sheet in June, suggesting that the days of abundant liquidity are truly over..
Speculative risky assets, such as cryptocurrencies, were revised lower as their higher prices (compared to 2019) had been justified by a large creation of USD. The correlation between bitcoin and stock indices has remained high and will continue to do so unless bitcoin becomes widely used as a means of payment – which is unlikely to happen soon.
The bolded section implies that cryptocurrencies – and stocks – could fall further once the Fed begins to trim its bond portfolio by $9 billion in June.
JPMorgan analysts estimated last week that bond yields needed to rise another 200 basis points before the equity risk premium returned to pre-Lehman crisis norms.
Bitcoin may be pixel-perfect active, but that doesn’t mean a bottom has been set. Camberwell carrot, anyone?