It grows, falls and grows again. We analyze the reasons for the excitement of investors around cryptocurrencies. The main mistake of American miners
Bitcoin rose again over the weekend thanks to the news about the launch of the first exchange-traded bitcoin futures fund by the ProShares fund manager.
"We plan to launch the first bitcoin-related ETF on Tuesday on the NYSE," said Michael Sapir, CEO of ProShares.
The largest cryptocurrency grew by 5.5% and as of 7:44 in New York was trading at about $61,032, getting close to the April highs. On Saturday and Sunday, it dropped to almost $59,000. Bloomberg News reported Thursday that the SEC is unlikely to block the start of product trading this week, according to sources familiar with the matter.
In general, the main coin shows more than a twofold increase since the beginning of this year, as the market is faced with signals of increased adoption of digital currencies by governments, as well as greater maturity of asset classes (before the suppression of cryptocurrencies in China and concerns about energy use).
Other cryptocurrencies also rose on Monday, with the second-largest ether up about 3.4%. According to CoinGecko.com, Binance Coin again took the third place in the value of the cryptocurrency after growing by 17% over the past seven days.
Bitcoin's rise is causing concern for Rick Bensignor, president of Bensignor Investment Strategies and a former strategist at Morgan Stanley. Depending on Monday's price movement, this could "make me think twice about buying bitcoin now, especially since it's on the back of record highs," he said in a note on Monday.
If you, like Rick, are in no hurry to buy at the highs, and expect the usual pullback with the following news, and even without them, I suggest you think about why this is happening. Why are investors happy to invest in such a volatile resource that has no real support. Understanding this will help us more accurately assess chances in the future.
John Outers, one of the leading analysts at Bloomberg and the Financial Times, believes that the most convincing explanation for the record growth of the cryptocurrency may be its resilience in the face of tough measures from Beijing.
In particular, he draws attention to the speed at which the growth and subsequent rollback of the leading cryptocurrency from high positions occurs.
Here's what has happened to the dollar value of bitcoin over the past decade, as shown on a logarithmic scale:
As we can see, the cryptocurrency has experienced many dizzying rises, including speculative climaxes, sold out according to the classic scenario of a collapsed bubble, and then after several years returned victoriously with another big rally.
The crypto market entered this year in the excitement of its latest speculative mania, which peaked in April, followed by a classic sale of digital assets. The fall in technological growth stocks naturally preceded the turn.
After that, it could be assumed that the market is waiting for another recovery period before the next "run to the high". But it was not there: bitcoin returned, almost having won back the summer subsidence in price.
Reasons for the demand for bitcoin
There are several possible explanations, but none of them are satisfactory. Or rather, none of them exist on their own.
Cryptocurrency as a safe haven
There are some arguments in favor of the fact that bitcoin can be considered as a means of protection against inflation. This is definitely seen by many investors as a protection against currency depreciation.
Inflation expectations are swaying the market: they peaked at the beginning of this year, and then declined, but now they are again exciting economists, politicians and traders. No one knows how difficult it will be to supply raw materials across the entire spectrum - from gas and oil to wheat and meat - this winter. Therefore, no one is able to confidently put a limit on possible inflation, although the governments of the United States and other countries are doing everything possible to calm the population.
There is a nuance here: many analysts believe that market expectations regarding the Federal Reserve have changed. America's financial regulator is now expected to take tougher actions than it took earlier this year, which means there is less reason to worry about the depreciation of the dollar.
In fact, this mistake can cost many a fortune.
So, recently Nouriel Roubini convincingly explained why the Fed will not be able to raise rates in the coming year. It's hard to disagree with him.
However, look at the dynamics of growth and decline in the cryptocurrency market. It seems that bitcoin is increasingly behaving like a "risky" asset. It rises in value when stocks are doing well and bonds are trading poorly and people are feeling optimistic. In fact, if bitcoin were a safe haven, periods of optimism should cause less need to hedge against periods of general panic and dumping of other assets.
Indeed, the biggest increase in the figure happened in April, when it became clear that this year many countries from the G-7 will succeed in vaccination and will be able to open their economies.
If you look earlier, bitcoin's peak at the beginning of this year came around the time when stocks stopped a protracted rally against bonds.
The relationship between stocks and bonds (represented in the chart below by the ratio between the most popular exchange-traded funds for the S&P 500 and treasury bonds for more than 20 years) has been almost horizontal for six months and has been showing signs of an upward breakout in recent days - just as bitcoin is also breaking up - just during the issuance of large pools of "cheap bonds".
Despite all the gloom, these two indicators can tell us that the mood is becoming positive again:
So the mere explanation of using BTC as a safe haven does not convince.
Firstly, the very nature of price movements indicates to us a speculative component that seems to dominate the coin market. In other words, bitcoin is not so much a storage tool as a trading tool.
Secondly, whatever the future of bitcoin or other cryptocurrencies, they are too far from maturity to have reliable connections with other asset classes. In other words, BTC movements reflect more general market sentiment (and, of course, the news background). Bitcoin price trends still have little to do with other critical variables in the economy, and much more to do with sentiment waves as people try to determine the ultimate role in the economy of undeniably exciting technologies.
However, the problem this year is that other asset classes are losing their traditional ties. Of course, this is a direct result of pouring a huge amount of cheap money into the financial sector.
At some level, there is a connection between all market segments, even if you only see its echoes.
The origins of interest in bitcoin during the pandemic
Recently, I have often touched on this topic - the consequences of injecting low-cost employees due to the low interest rate set by the Fed dollars into the economy. One of the articles covered in detail the Fed's previous experience with cheap loans, which allowed the economy to get out in 2008 after the collapse of Lehman Bank, which dragged the world economy to the bottom.
So, the ongoing hype around bitcoin is a direct consequence of these same cheap dollars.
What you should understand about the markets, even if you are not a trader, is that it doesn't really matter who won today – the bulls (traders betting on price growth) or the bears playing against them. While there is a brisk trade in both directions on the financial markets, everyone is satisfied with everything.
The unique problem of 2021 is that the oversupply of cash has created a huge problem for banks and investment funds: they must provide good returns to their customers. But the real production sector is idle due to quarantine measures. Therefore, financiers naturally turned to investing in stocks, bonds and other financial instruments.
Even "junk" assets with ratings sweeping the floors were brought up - simply because there is nothing else to buy. Almost.
And yet neither stocks, nor even bonds, are able to provide a good profit this year.
Why? Because the market follows the news too closely. During the boom period, everyone buys, as it was in the spring. And then there are too few bears in certain segments – the market cannot transfer to interested buyers as many shares as they want to buy. Just because they are not on sale - sellers keep them.
So what to do?
The crypto asset market comes to the rescue. Of course, it no longer consists of one bitcoin. Bitcoins, stablecoins, shares of crypto exchanges, DeFi lending tools and even digital art objects in the form of NFT are traded here. The digital asset market has become a powerful huge ocean where everyone can catch a fish to their liking.
And it became so precisely thanks to the constant influx of real money through the financing of startups that are engaged in these technologies of the future.
On the one hand, investing in such a startup means providing for yourself and your grandchildren (if the technology gets scale). And with the beginning of the pandemic, most of these technologies, which have a competent CEO and a business plan, gain scale.
On the other hand, the rapid development of these technologies stimulates new flows of secondary investors and traders who earn money on speculations of growing assets.
This is one of the main reasons for the lively interest in bitcoin and its brothers: This is an excellent asset, which, unlike stocks and other traditional instruments, is much better suited for intraday and short trading. Because it is super-volatile.
Yes, we have come to a certain paradox: the main disadvantage of the currency from the point of view of traditional institutions is its main plus from the point of view of traders. Unlike stocks, there will always be enough bears and bulls in the bitcoin market. This currency is too volatile for the market to lose the opportunity to cover even a large volume of transactions at some point in time.
And this is the answer to the eternal question about the Worldwide Conspiracy, "aren't three people from Wall Street holding all bitcoin in their hands?" They don't hold it. Otherwise, at some point in time, everyone would want to dump it or, conversely, buy it, and then the market liquidity would not be enough.
But judging by how quickly bitcoin stops its growth or rushes up again, it can be assumed that quite large pools of this coin are traded on the market at once. That's why the price fluctuates so much, and then stops the downward movement for no particular reason, for example. Certain groups enter the market in order to stop the decline of bitcoin, or vice versa, to limit growth. And it's almost not hidden. Sometimes in the news you can read something like "The Katie Wood Foundation bought the fall of bitcoin."
Of course, Katie Wood does this not on a voluntary basis, but because the price of the asset is low now – it's time to buy. Because she knows the system, and she knows that the market needs an asset like bitcoin. So it's still not about a conspiracy. It's just that the market regulates itself: while the interest of large prime brokers in BTC is hot, bitcoin will never roll back to the price of 20,000.
Thanks to this, US banks reported huge profits in the third quarter, while the manufacturing sector is suffocating. Twenty years ago, this would have been impossible. But now the financial world is on its own, and the real sector is on its own.
The need for bitcoin is the root cause of the fact that people turn a blind eye to the largest thefts in numbers over the past year. This is also the reason for the "silence of the lambs": the lack of a clear government response to the use of anonymous currency.
Still don't believe it? Pay attention to China and its crusade against cryptocurrencies.
China and Bitcoin: A hard romance
For example, James Bianco of Bianco Research LLC, an enthusiast of crypto technology opportunities, suggests that the way the sector reacted to the crackdown by the Chinese authorities, which happened around the time bitcoin peaked, was "one of the most optimistic things that has ever happened to crypto."
According to him, almost 50% of the computing power (called hashrate) of the bitcoin blockchain was turned off, collected and moved to another country in a few months. And no one noticed! This indicates an incredibly stable system. I believe that this realization again contributes to the fact that BTC will again exceed 60,000 dollars.
He also points out that other countries now have the opportunity to occupy the space previously occupied by China.
It really is. China is demonstrating enormous instability, which is a direct consequence not only of quarantine measures, which are quite successful in themselves, by the way, but also of politically biased decisions that have suppressed entire industries since the beginning of the summer.
So, two years ago, China accounted for about three-quarters of all computing power that was used for bitcoin mining. Now this number has dropped to zero, and the total share of North America, the USA and Canada is approaching half. In particular, given the state of geopolitical rivalry between the US and China, this is a real turnaround in what could be a key technology of the future.
But it's not about political superiority. Although we must admit, the United States was lucky - China put the biggest on itself.
The US government, strictly speaking, treats bitcoin badly. It's just that big financiers are forcing them to endure, explaining in an accessible way on the sidelines that without trading in digital assets, the whole system will be kaput very quickly. This explains why the US government is so vague about cryptocurrencies: and it would be banned, but it is not yet possible.
The optimism of miners is not the time to relax
Separately, I want to draw your attention to the fact that America has become the second country in terms of hashrate, having concentrated a lot of miners. This rashness on the part of the miners will cost them business and, probably, free will in one and a half to two years. Countries that are quieter in terms of regulatory policy should have been chosen for the placement of capacities.
But if it scares you off, you still don't understand the market: while you are afraid, many have already made a fortune for themselves. It's not about how long bitcoin will live – things have no value in isolation from the context. For investors, it is only important that it is irreplaceable right now and that these people know the signs by which it will be possible to understand when it begins to lose its value. Until then, Bitcoin is probably the best thing you can buy. Just keep in mind that the distant future of cryptocurrencies is not as rosy as it seems to many thanks to the success of BTC this year – the tests of the entire industry for strength will begin later.
Whether it will survive depends on how deeply it will take root now. Personally, as an adherent of advanced technologies, I would like that. But reality can fail. Therefore , it makes sense to observe and... catching a wave. In the end, this is all we can individually.
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