As whispers of Bitcoin’s (BTC) promised financial breakthrough failing to materialize over the last few months have continued to garner steam, the price of the premier crypto asset recently surged above the all-important $12,000 psychological threshold, only to once again slip right under.
However, as part of this development, the total cap of the crypto market reached an impressive $386.4 billion, a level only attained back in 2018. That being said, a multitude of factors, such as poor investor perception and lack of regulatory direction, seems to be preventing the market from flowering as previously envisioned by many experts.
In this regard, Sam Tabar, co-founder of decentralized P2P token trading network Airswap and ex-managing director for Bank of America in the APAC region, believes that while there is a long term structural upside for Bitcoin, there will be cyclical ups and downs like with any nascent asset class. However, the primary issue holding traditional capital market participants from entering this market is information asymmetry: “Certain players aka ‘whales’ control most of the market and have created massive market spikes or collapse. Market gyrations are ok, but massive information asymmetry is not.”
Expounding his views on the matter, Ariel Zetlin-Jones, associate professor of economics at Carnegie Mellon University’s Tepper School of Business, told Cointelegraph that a primary headwind against cryptocurrency demand continues to be the COVID-19 pandemic, especially as more people start to face the economic uncertainty. He further added that it’s only natural that during uncertain times, not many casual investors would be willing to invest their life savings in a highly volatile asset class such as Bitcoin.
Facts around the U.S. dollar
Amid the pandemic, the United States dollar has thus far maintained its strength, in part, due to being the world’s reserve currency, and as long as countries continue to see the U.S. as a global powerhouse, its monetary value will continue to remain strong regardless of the recent stimulus packages.
However, in terms of the dollar’s recent performance, there have been some hiccups. For starters, the U.S. dollar index is currently at 93.2, down nearly 10% from its peak in March. Also, due to being a global reserve currency, the dollar tends to increase in value during downturns, complicating assessments of its performance at such times.
Furthermore, increasing social and political tensions along with incessant printing of dollars are creating conditions that can potentially form a bubble of hyperinflation in the foreseeable future. The situation has pushed some major investors like Warren Buffett, the CEO of Berkshire Hathaway, to trim his company’s position in banking and investing heavily in stable stores of value such as gold.
Buffett’s decision to completely close Berkshire’s position on Goldman Sachs also comes at a time when the financial institution recorded its second-ever highest quarterly trading revenue of $13.3 billion, thereby suggesting that Buffett and his associates are not comfortable with the idea of betting big on the long-term prospects of the banking industry. Ryan Taylor, CEO of the Dash cryptocurrency, told Cointelegraph:
“The U.S. is not the only country to undergo massive stimulus in 2020. Also, in times of crisis demand for USD tends to spike globally. These two considerations give the U.S. a lot of leeway to inflate supply without immediately devaluing the dollar. However, we are starting to witness signs that inflation is a risk. Certainly the massive stimulus started by inflating asset prices, including equity and debt. And just last week the U.S. CPI for July registered the highest monthly growth rate since 1991.”
Crypto’s performance has been deceptively strong
Even though many naysayers have repeatedly pointed out the fact that BTC has failed to surge exponentially and reach new all-time highs despite the economic conditions being ripe for it, the cryptocurrency market as a whole seems to be having a stellar year.
For example, Ether (ETH) has quadrupled in value, rising from $105 to $440 since hitting relative lows earlier this year in March. Similarly, currencies like Bitcoin, Ripple (XRP) and Dash are up by 72%, 50%, 124%, respectively, while many other smaller cryptocurrencies, especially in the decentralized finance sector, are seeing triple-digit growth as well.
Tabar believes that crypto’s strong performance can be gauged in terms of the fact that some family offices have started to include BTC in their portfolio holdings. Not only that, certain neo-banks like Revolut and easy access investment apps such as Robinhood have also enabled easier access to crypto. This suggests that the next generation of young investors may eventually help spur the adoption of this asset class. In comparison to traditional commodities, Taylor has pointed out that crypto has outpaced most precious metals, like silver, which is up about 54% year-to-date:
“Other precious metals are generally below 40% returns, especially if they have industrial uses. I suspect the attention of the general public continues to be fixated on the performance of stocks and bonds that makes up their retirement portfolios.”
Also, Bitcoin has fared much better in comparison to oil than many fiat currencies, as oil prices have dropped due to negative growth in the economy influenced by the ongoing COVID-19 pandemic. Statistically speaking, the year-to-date price of oil is down 32%. Furthermore, when compared with the S&P 500 (which is up +5.8%), Bitcoin’s year-to-date return currently sits at around 71.2%. Peter Goodrich, tax manager at U.S. accounting firm Prager Metis, told Cointelegraph:
“When comparing the top market cap cryptocurrencies like Bitcoin, Ethereum, XRP to precious metals like gold and silver, there are increasingly positive correlations being witnessed between both markets that were accompanied by delayed market impulses.”
Zetlin-Jones also pointed out that leading cryptocurrencies are appreciating relative to USD, gaining almost 0.3% per day on average over the past 90 days in comparison to May 2020, beating out the S&P 500 that has posted an average daily gain of 0.05%. However, Denis Vinokourov, head of research for digital asset exchange and brokerage firm Bequant, believes that since gold does not really compete directly with oil, Bitcoin too should not be related directly with traditional commodities: “It has properties that others do not and that is its strength, putting Bitcoin against the rest of the market is like comparing apples to oranges.”
The future of crypto economy
While it’s still far too early to judge, Taylor believes that with each passing month, expectations of inflation will continue to increase, leading many investors to seek out inflation-resistant commodities like top-tier digital assets. “I personally believe that we’re in the early stages of a bull run that’s actually moving along quite steadily,” he said. Also worth remembering is that the last major crypto bull run started in about mid-2015 and built up gradually to explode in the second half of 2017, suggesting that an overnight surge is unrealistic.
Lastly, despite increasing adoption, there are still a lot of challenges for the masses when it comes to owning cryptocurrencies. For example, opening a digital wallet or even a crypto trading account is still not as easy as many would like to think. Commenting on the subject, Mike Onghai, serial entrepreneur and seed investor for Coinbase and TZero, told Cointelegraph:
“If you look at history, it took about 20 years for cell phone web browsing to become as easy as it is now today. It took web browsing several years to go from Netscape to where it is now. Ease of owning cryptocurrencies will take some time. […] The digital assets age still feels early — it feels like 1995 in the web browser era (after Netscape’s crash).”
A somewhat similar opinion is shared by Vinokourov who believes that most people tend to forget the relatively young age of Bitcoin as well the rest of the market. Not only that, while Bitcoin and other digital assets have shown their worth during times of geopolitical and economic uncertainties, these assets are still considered to be much riskier by most:
“There has only really been one cycle of initial coin offerings that did attract substantial interest from traditional firms. The core market may not be as ‘hot’ at the moment, but another area of the market that has attracted VC money recently is decentralised finance (DeFi). It’s always helpful to remember that this is a marathon, not a sprint.”