Noelle Acheson is a veteran of company analysis and CoinDesk’s director of research. The opinions expressed in this article are the author’s own.
The following article originally appeared in Institutional Crypto by CoinDesk, a weekly newsletter focused on institutional investment in crypto assets. Sign up for free here.
March 12 was not bitcoin’s worst 24-hour price crash ever. That honor belongs to April 11, 2013, when bitcoin fell by almost 50 percent.
Comparing the two crashes helps to understand what happened this week. It also helps to form a picture of what this sector could look like going forward.
For context, in April 2013 Ethereum had not yet launched, Mt. Gox was the largest bitcoin exchange and the Harlem Shake meme dominated the internet. The previous month, the price ranged between $34 and $94, and the average transaction (according to Coin Metrics) was under $800.
Chinese demand powered the retail-driven market. Professional custody services were just warming up (BitGo, one of the first, was formed in 2013). Coinbase was less than a year old. BitMEX had not yet created the perpetual swap. Heck, CoinDesk didn’t even exist then (we started publishing the following month).
In 2013, bitcoin was the “asset of the future,” a decentralized representation of value, a protest against powerlessness and a way for savers to reduce their vulnerability to central bank action. Market participants believed in the story. By some accounts, the price started to rise along with international attention on the Cyprus banking crisis, in which a haircut was applied to all deposits over €100,000 at the two largest banks.
If you were a 2013 bitcoin investor and you time-travelled to now, you would not recognize the scene. Chinese demand has dissipated. Mt. Gox is a bitter memory. A lively derivatives market drives volume. Big, incumbent financial institutions have set up digital asset desks. Really, you’d pinch yourself.
You might also be a bit alarmed. You’d love the legitimacy and the platform sophistication, and you’d get genuinely excited about all the smart people who have left their finance jobs to work in crypto. You’d almost certainly be stunned the sector has evolved so quickly. And you’d be thrilled the institutions have taken an interest. Finally, professional traders have grasped the possibilities.
But you’d also wonder where
the ideology went, where was the focus on empowerment rather than profits.
Crypto markets went and grew up. They substituted their hoodie for a button-down and put on some big-boy shoes. They made new friends, became more responsible and entered a new world of risk.
A tale of two crashes
To get a feel for how that risk has changed the sector, let’s look at the market behavior of the two crashes.
Back then most market participants were long. The absence of a liquid derivatives market made shorting relatively cumbersome and expensive. Trading was dominated by those who had taken the time to understand bitcoin, and they acted according to whether they thought it was over- or under-valued. The April 11 crash was triggered by profit taking – the price had more than tripled in the previous two weeks. It was a narrative-driven slump.
What’s more, it was isolated. That same week, the S&P 500 was largely flat, as was gold. It was entirely a bitcoin story.
Today the market is dominated by professional trading desks. They know about markets. While many are probably attracted to the idea of a fiat alternative, their jobs are about playing numbers. For them, it’s not about bitcoin, it’s about volatility.
Last week’s crash was a liquidity event, triggered by margin calls in crypto and other assets, and by a massive investor panic. This crash was about raising cash and covering liquidity. It had nothing to do with bitcoin itself.
Nor was it isolated – the S&P 500 suffered its worst 24-hour slump in history. Bitcoin’s story was not part of the activity this week. Bitcoin was just another financial asset getting trampled as investors headed for the exit.
That is why its safe haven narrative has died.
And that’s a good thing. Let’s look at why.
First, bitcoin was never a safe haven. Even before this recent crash it was just too volatile, too young and too untested for that role. In spite of the lack of logic, the narrative endured because so many wanted it to be true.
Now that we can put that legend to rest – an asset that can fall by over 40 percent intraday is unlikely to ever be taken seriously as a safe haven – more realistic expectations should emerge. This will support credibility amongst the investment community and perhaps give bitcoin a more justifiable role in portfolio management.
Also, this week has revealed there is no such thing as a safe haven. Gold and T-bills, the assets the market traditionally turns to in times of turmoil, also fell, largely due to liquidity squeezes. Investors were scrambling to raise cash this week – but even that safe-haven asset could come under strain as the global economy tips into recession and geopolitics adds tensions to monetary policy as well as faith in sovereign credit.
Yet, portfolios need diversification – market assumptions may have been turned upside down and trust in correlations may take some time to recover, but the underlying math hasn’t changed. Even with investment principles in turmoil, the demand for alternative assets will not go away, and professional investors are already taking stock, adjusting objectives and rebalancing.
New role for bitcoin?
In a world worried about income, assets like bitcoin and gold that don’t depend on cash flows for their valuation are likely to occupy an increasingly important role in investment allocations as “alternative assets.”
The greater the range of alternative assets, the better for investors, especially in troubling times like these. Analysts and fund managers will be looking for opportunities to offset the upcoming shift in market fundamentals – many are likely to take a closer look at bitcoin, which does not depend on macroeconomic metrics.
In a market where relationships are broken and assumptions are smashed, an alternative asset – vulnerable as it may be to money flows – does start to take on an appealing narrative of its own, more innovative and more credible than that of the safe haven.
With this, the integration into traditional finance that we wanted for bitcoin can do so much more than make it vulnerable to the ravages of global sentiment. It can also finally bring it the opportunity it deserves.