Monat: November 2022

Key Takeaways

• Cathie Wood says that institutions may take step back from crypto
• She believes that they will allocate more to Bitcoin and Ether once they take time to study the crypto space
• I believe she may be too optimistic, that the crypto industry has taken a battering and it may take longer to recover from

 

Crypto is in a bad place right now.

The most concerning development coming out of the last few weeks – and I think you will agree, there have been a few – is perhaps what it all means for the reputation of the industry going forward.

What institutions are going to put Bitcoin on their balance sheet now? What pension funds are going to move into digital assets? FTX’s implosion (which I wrote about in detail here) is so high-profile and jarring that it feels delusional to expect anyone connected to traditional finance moving into the space. Is the damage irreparable?

Cathie Wood hints at institutional stepback

On this note, I thought Ark Invest founder Cathie Wood’s interview with Bloomberg last week was telling. Long known for her ultra-bullish views on all things Bitcoin, she even reiterated in the interview her confidence in her price prediction of Bitcoin, which she believes will be worth $1 million per coin by 2030.

This was not a surprise, nor was it wholly unpredictable. Wood is adamant that Bitcoin will change the macro landscape long-term. She has positioned highly aggressively in the market, betting on risky tech stocks, Bitcoin and other assets that have struggled amid the transition to a new interest rate paradigm – as the performance of her flagship ETF shows below:

I felt that something else was notable in her interview, however. “I do think, though, that the one thing that will be delayed is perhaps institutions stepping back and just saying, ‘OK do we really understand this?’”, she said.

This hints at the big danger here. All through the pandemic, one of the most bullish things for Bitcoin was the trend of institutions pouring into the space. There was Tesla. There was ETF chat. There was Grayscale. There were public mining companies. There was Coinbase floating on the stock exchange. Hell, there was even El Salvador declaring Bitcoin as legal tender.

But now that the low-interest environment has come to a close, and liquidity is getting sucked out of the economy, Bitcoin and crypto are facing something they have never had to face before – a pullback in the wider economy.

Let us not forget that Bitcoin was launched in 2009, into the greatest bull market in history. It has not yet been tested amid a bearish macro climate, and hence this is all unprecedented. And against this test, crypto is straining.

BlockFi, Celsius, Voyager, Three Arrows Capital, and all the other bankrupt firms, which are now joined by FTX, have also painted crypto in such a bad light that it is not surprising to hear analysts warn of pullbacks in institutional adoption. Wouldn’t it be more of a surprise if there wasn’t?

Optimism

I should note that Wood did add that she thought Bitcoin is coming out “smelling like a rose” from all this. While I certainly wouldn’t go that far – the entire industry is getting its reputation pummelled if you ask me – I see where she is coming from.  

But while Bitcoin may have no counterparty risk, and hence theoretically is immune to the sorts of implosions we have seen at centralised companies like FTX, this is the real world. And in the real world,  in order for the average citizen to access it – not to mention institutions – centralised companies are needed.

And until the greed, reckless leverage, naïve risk management and outright fraud (not naming names) in the industry ceases to exist, Bitcoin won’t gain any significant traction in the mainstream financial space. Institutions will be a lot warier of investing in the space now after so many high-profile blow-ups. Regulation is coming in strong. Returns are no longer through the roof.

This is why I disagree with the optimistic tone that Wood set later in the interview:

“And once (institutions) actually do the homework and see what has happened here”, Wood said, “I think they will be more comfortable moving into Bitcoin and perhaps Ether as a first stop, because they will understand it more”.

For me, understanding Bitcoin more also comes with the comprehension that it continues to trade as an extremely high-risk asset, in what is now no longer a zero-rate environment. While the long-term vision may be for Bitcoin to be a reputable inflation hedge, that is not where it is right now – something asset managers will realise.

Crypto has also put a sour taste in the mouth of anyone who has touched it this year. FTX is just the latest embarrassment for the industry, as the world watches on with a mixture of smugness, pity and disgust. Against this backdrop, the reputation of the entire space has taken a hammering.

And as interest rates rise, a cost of living crisis surges and data continues to point towards a struggling economy, the crypto party will take a little longer to resume than Cathie thinks.  

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