In the early summer of 2021, it was a popular idea that Bitcoin (CRYPTO: BTC) may be a safe-haven asset, hypothetically independent of traditional markets. It was generally believed positive movements toward regulation helped perceptions by institutional investors and that that new stream of investment — along with stimulus-powered retail buyers — put the motive force behind the rising prices.
But have these assumptions espoused by investors, analysts, and pundits stood the test of time, now that Bitcoin has tumbled from its high of more than $68,000 in November 2021 to just under $29,000 at the time of writing?
We touched base with billionaire investor, entrepreneur, political candidate, and Chairman of the Bitcoin Foundation, Brock Pierce, to revisit some of the prevailing wisdom of 2021 and see how it bears out in these comparatively bearish times.
Benzinga: How has institutional investing impacted the crypto market?
Brock Pierce: In the last couple of years, institutional investors have played a significant part in the crypto market, as many more tools have become available, such as institutional custody and prime brokerage services, to get them comfortable interacting in the market as well as the futures ETF and other new products offered by financial institutions.
Does inflation play a central role?
Inflation will always be a key theme when people discuss cryptocurrencies as well as any traditional currencies and investments. That being said, while retail investors are being hit by the broader economic downturn, we will see slightly less speculation on risk assets.
Is there a positive role for regulators to play in crypto?
For the first time, we are starting to see regulators really embrace and show more effort to understand how cryptocurrencies can and do affect economies. Hopefully, we will continue to see more open-minded and informative policies being formed.
Is the crypto market going to continue to follow traditional markets?
Yes, whenever there are significant dislocations in global markets, smaller markets like cryptocurrency will be affected and follow in the short term.
What opportunities exist for retail and institutional investors in this down market?
Retail and institutional investors alike should be focused on finding important projects and continuing to invest in the space by taking a long-term approach with a focus on what is to come over the next cycle.
Is this a natural cycle, a cautionary tale, or both?
There is no reason to believe that this isn’t just another crypto cycle, that has been dragged down by weakness in global equity markets.
The Role Of Inflation
It seems to be the general consensus that Bitcoin stands outside the traditional financial system — in some ways. In other ways, not so much. For example, inflation seems likely to impact all traditional and alternative asset classes as long as it means investors have less money to spend.
Omid Malekan, crypto/blockchain author and adjunct professor at Columbia Business School, pointed out that far from being a safe haven, Bitcoin may show more sensitivity to some pressures than established markets.
“Crypto is a totally unencumbered market — global, 24/7, little insider information, few regulations — so it tends to react to macro developments faster than other markets,” Malekan said. “Inflation mostly plays a role via the narrative of digitally scarce assets like Bitcoin being a good hedge in times of high inflation. But this narrative can cut both ways. Bitcoin rocketed higher while central banks were stimulating but it is now falling as they pull out the stimulus. It reacts more to future expectations of inflation than the current numbers.”
Chris Barnes, Chief Product Officer and Managing Director of the Financial Services Research division of Escalent, sees inflation impacting crypto as it does every part of the economy.
“Inflation is affecting everything across the board by taking a bite out of the broader set of markets, including stocks and other asset classes, and by chewing into people’s paychecks in their daily spending. As a result, there will be a natural decline in retail investing until things start to stabilize,” Barnes said.
Scott Melker, “The Wolf of All Streets”, a leading crypto investor, trader, author and podcaster, believes inflation definitely has a role in the current bearish trend, but believes that Bitcoin still has a role as a safe haven asset.
“Inflation plays a central role. The consequences of easy money and loose monetary policy are ripping through all markets like a virus. A cornerstone of crypto is that it is a hedge against inflation, which has been proven time and time again in countries with hyperinflation... In the US, crypto finds itself closely mirroring other markets, hit by the same macro storm as every other asset... In a risk-off environment, all markets are correlated. Bitcoin will decouple as markets find a bottom, much like the 17X Bitcoin rise after it bottomed in March 2020,” Melker said.
Impact of Institutional Investment
In virtually every article discussing BTC during the bull run, institutional investors were cited as a prime reason for the continued rise. How do analysts and investors view the role of institutional investors now that crypto has started to slide?
Lars Seier Christensen, Chairman of the Concordium Foundation and Co-Founder of Saxo Bank, thinks institutions are not yet all in on crypto — though the will is there.
“If you look apart from dedicated Crypto VCs, traditional institutions are still not heavily involved due to risks and regulatory concerns. There is a huge interest and latent demand, but really massive inflow will only be seen as regulatory aspects become stronger and more clarified. Many have an interest and also large family offices, but they hesitate to commit due to these concerns. But these segments represent big opportunities for future adoption,” Christensen said.
Gabriella Kusz, CEO of the Global Digital Asset & Cryptocurrency Association, believes institutional interest has been an important proof point for crypto to reach mainstream retail investors.
“I believe the largest impact can be seen with the increasing maturation of the asset class and the heightened degree of correlation between traditional equity (stock) market and the crypto market. Even the International Monetary Fund has recognized that increased correlation between Bitcoin and equities means cryptocurrencies may no longer be considered a fringe asset class,” Kusz said.
Melker believes institutional investment played a key role in the last bull run and the perception of crypto as an investment, but sees investment shifting to Web3.
“Institutional adoption sparked the last bull market when companies like Tesla, Square, and MicroStrategy brought Bitcoin into the mainstream. The trend quickly shifted to heavy VC investment in Web3, to the tune of tens of billions of dollars. This also attracted hedge funds and prop shops, all of which were quick to sell coins as the bear market commenced, because of the easy liquidity and 24/7 availability of the market. Like all boom and bust cycles, the tide will return when macro conditions improve, subsequently improving the perception of crypto along the way,” Melker said.
Regulation To The Rescue?
Just a few years ago, there was a strong aversion in the crypto space to the interference of regulation from any government. As more retail and institutional investors buy into crypto, can we come to view regulators as allies helping to stabilize the market?
Erin Holloway, President of Prime Trust, believes that a clear regulatory structure is a necessary milestone toward the maturation of the space.
“Regulatory clarity is what everyone is striving for… everyone wants to know what the rules are so they can get comfortable with entering the crypto game. You won’t want to play if you don’t understand the rules. With more institutions entering the ecosystem and further support from legislators, those who are curious to interact with crypto can now do so with more trust,” Holloway said. “As policymakers work with industry leaders to gain a better understanding of cryptocurrency and recognize the inevitability of it being a part of our financial system, we anticipate widespread adoption and implementation of regulations that impact the crypto market.”
Jack Bouroudjian, Chairman of Global Smart Commodity Group, agrees that regulation is part of the critical path to a more steady and accepted market.
“Right now there is no regulation. Yes, regulation would be a huge help, especially in the determination of stable coins and also the platforms on which they are listed. I think the creation of an SEC commission, which has recently been announced, is the start of a regulatory process which will see the crypto markets held to the same standards that other asset classes are,” Bouroudjian said.
Wes Fulford, CEO of Viridi Funds, sees some positive signs from the Biden administration and is hopeful that regulatory action will help open the crypto market to the wider world.
“The recent executive order by President Biden called on US government agencies to explore a variety of cryptocurrency regulations that will help protect investors while instilling confidence in the digital asset space. These types of regulatory actions should serve as a net positive for the cryptocurrency industry, aiding in the education and protection of cryptocurrency participants,” Fulford said.
Christensen put a finer point on the matter, positioning regulation as a key consideration for a prosperous future.
“Overall, regulation is a key to a trustworthy and credible market. Any market, including crypto. The biggest issue for crypto that should be on everyone’s mind is upcoming regulation. You will HAVE to address this seriously, both to thrive and attract investment. It will be hard, as we have experienced in the past decades in TradFi, but it will also help the market mature and achieve much broader adoption, so it should be generally welcomed, although mistakes and poorly designed regulations will be part of the journey. Overcome it by trying to influence lawmakers and regulators, but don't ignore it,” Christensen said.
Summary
There have been reasonable prognostications of global financial hardship since the pandemic, so it seems likely the state of the current crypto market can be viewed as a natural progression and ultimately desirable correction to the heady enthusiasm of 2021. After all, nothing climbs forever and sadly that means Bitcoin goes up and comes down like everything else.
Crypto may not be able to insulate its holders from global food shortages and rising inflation — but it doesn’t truly have to be untouched by these global factors, just hopefully a little more stable than traditional investments. One way or another, we are moving toward a world of more comprehensive crypto regulation and acceptance — two sides of the same coin, driving global mainstream adoption.
Perhaps it is best to end with comments by one of the visionaries who is every day making a mainstream crypto market a closer reality.
As Gabrielle Kusz put it, “Crypto is a volatile market — this is a natural cycle in what we see in the crypto space. It is a maturing market and as such there will be challenges, failed projects, and products which do not advance. But this is all part of the evolution of the crypto asset class and the development of a mature, vibrant, and resilient financial sector.”
Cover modified from image by Raffaele Zandonella Necca from Pixabay
