Two events came to our attention this past week — one that we judge to be very good/bullish, and one that is most assuredly not.
Let’s get the bad news out of the way first.
First, the Bad News
Barring an unexpected and unlikely move, this week is going to mark an occasion that has only two precedents over the past six years, and has not happened since November 2015.
Unfortunately, you’re going to have to keep the champagne locked up in the cellar for now as this will be an event we would all just as soon forget. Why? Assuming that its price remains in the current range, then on November 1st 2018, for the first time in three years, Bitcoin’s 12-month trailing return will move from positive into negative territory. A Halloween horror show, indeed.
Source: Coinbase Market Data
I’ll follow that up with this little gem of a table. I don’t think there’s a better way to illustrate the wild ride that has been crypto for the past five years, than this:
As you can see, anyone who bought their first Bitcoin in January 2013 had a very merry Christmas that year. Conversely, those who entered the market in January 2014 ended the year with a big lump of coal (or a lump of something else entirely) in their stockings.
You may ask, why am I bringing this up? It’s not because I enjoy dwelling on the negatives. After all, my parents always encouraged me to seek out the positives in any setbacks or disappointments. Maybe that’s because I was raised in the upper Midwest, where the weather is consistently terrible.
Nonetheless, the fact remains that we arrived at this milestone amidst a remarkably stagnant period. I didn’t start actively trading crypto because I expected it to be boring. Quite the contrary. After all, one of my favorite crypto quotes comes from Arthur Hayes, founder of BitMex, who recently argued that “for crypto, a decline in volume and volatility is deadlier than white wine and painkillers”. Yet, as the charts below demonstrate, here we are.
In fact, Bitcoin’s annualized volatility is now below or on par with that of many of the largest US tech stocks, including Apple (AAPL) and Netflix (NFLX).
Source: Kosmos Research, Coinbase, NASDAQ
Not surprisingly, this has coincided with:
(1) Bitcoin trading in an ever-narrower range over recent months. In fact, when I last checked the price an hour ago, the 24-hour change was precisely 0.0%. We try not to stare at the ticker all day, but that was a first for me.
(2) Exchange-traded volumes are falling off a cliff. To take BTC as but one example, see below a table showing the lowest 10 daily volumes of 2018:
Yes, you are reading the table correctly: four of the ten slowest days year-to-date occurred last week and nine of the ten came this month. To put this in perspective, over US$ 11 billion traded on January 1 of this year.
Great — so the market is stuck in an almighty rut. How does that help us as investors?
Hold that thought for a moment. First, let me tell you about a conversation that we had last week that brightened our mood considerably.
Now, The Good News
Amidst all the crypto doom and gloom (but definitely no boom, sorry Marc Faber) my partner recently caught up with one of his friends, a macro hedge fund manager based in London. The crypto market loves to obsess over when that “institutional wall of money” is going to arrive. Well, this guy is an integral part of that wall. So we’re always interested in hearing his thoughts on crypto, to the extent that he has any.
After all, like most macro fund managers he doesn’t have much time for an asset class where the capitalization isn’t measured in trillions of dollars. As recently as the fall of 2017 he had admitted to knowing ‘next to nothing’ about crypto, and lacked the bandwidth or incentives to spend time learning more.
But this time the conversation went differently. He told us that he has begun reading up on the space and had questions. And if he is working his way up the learning curve, we strongly suspect that he is not alone. Our friend is not the type to waste time or energy on a topic unless he has identified a compelling opportunity. To us, more than anything we have read on Crypto Twitter, this was a bullish market signal.
Most importantly, we found it interesting that this conversation took place just as Bitcoin’s one-year trailing return was about to descend into negative territory.
However it’s important to consider these two data points — one good, the other not so much — in the context of what has transpired in the past year. Let’s briefly recap what happened to the crypto market in 2017, and why.
Past Is (Not) Prologue
Like most greed-driven bubbles, Bitcoin’s historic 2017 move started slowly. BTC traded at less than $1,000 on January 1st, and was worth only a few dollars more at the end of March.
But something happened in the second quarter — by the end of June BTC’s value had increased by over 250%. Three months later, it had doubled in value again. And December, of course, is when the frenzy went into full swing. Prices doubled in less than three weeks, and nearly touched $20,000 before finally collapsing.
Now, some might argue that initial coin offerings (ICOs) are what sparked the market frenzy. To an extent, we agree with this position. After all, the ICO mania is what initially shone the spotlight on crypto and forced the mainstream investing public to take notice.
Looking more closely though, we would argue that a more consequential trend emerged in the second half of 2017. Rumors of — and seeming steps toward — institutional market entry were what ultimately drove Bitcoin into its parabolic end-game.
An Annotated (Recent) History of Bitcoin
Source: Coinbase/Coinigy
Simultaneously, announcements of Bitcoin futures contracts, paired with headlines regarding Wall Street interest and breathless predictions of imminent change, conspired to fuel a self-fulfilling narrative of ever-higher asset prices.
CNBC, December 2017. Boo-yah!
The hysteria peaked on December 18th, 2017. Bitcoin had just hit an all-time high of $19,783 on Coinbase the day before.
Two weeks earlier the Chicago futures exchanges, CME and CBOE, had announced launch dates for their Bitcoin futures contracts. Predictably, the cryptoasset market went ballistic as new entrants flooded in ahead of the ‘wall of institutional capital’ that was widely rumored to be imminent and was going to propel Bitcoin to new heights. The price of Bitcoin doubled in the first two weeks of that month.
CBOE futures debuted on December 10th and traded 19% higher on their first day. Trading was halted twice due to exchange ‘circuit breaker’ rules. The market continued to buy, waiting with bated breath for the CME launch a week later.
The CME contract opened to much fanfare, and then…traded 2% lower. It was the embodiment of failed expectations.
And this was only the beginning of the pain. The institutional money never arrived in earnest and did not drive this bubble.
In short, 2017 was almost exclusively a retail-driven train, and the late-arriving punters got crushed in the derailment. The institutional capital has not yet joined the party.
Where Is The Proverbial ‘Wall of Money’?
Go to any crypto meetup or convention today and the same question will be asked. It will be repeated like a mantra — in the panels, during the keynote, and in the furtive conversations backstage:
“When are the institutions coming in???”
We’re like teenagers waiting by the phone, staring at it like Luke Skywalker stared at that X-Wing Fighter on Dagobah…just willing it to ring. Come on, Blackrock, show us some love!
There are an abundance of different but credible theories to explain what might push Bitcoin below the well-defended price floor of 5,800 that has been maintained since late June. On the other hand, the smart people we talk to in the space as well as the “crypto media” are fairly unanimous in their view that the next bull run will be driven by widespread institutional adoption — the “wall of money” — that in most permutations of this vision arrives on the back of a long-awaited Bitcoin ETF. While we love being contrarians, on this point we wholeheartedly concur.