Is Crypto Dead?
There is a strange page hidden on the internet that says Bitcoin has died more than 460 times.
According to that website, the cryptocurrency has been defeated 24 times so far this year. In 2021, it was defeated 47 times, and in 2020, it was defeated 14 times. Its death rate peaked in 2017, when Bitcoin hit a then-record high near the symbolic $20,000 handle in December, only to drop below $11,000 five days later, losing 45 percent of its value. In that year, the cryptocurrency seems to have died at least 124 times. Maybe only Prometheus has been killed so many times only to come back to life.
I've been looking at this so-called "Bitcoin obituaries" page for years, mostly because it's funny. The website is clear about what a "death" of Bitcoin means. It says that the cryptocurrency can only be considered officially dead when "a person with a large following or a site with a lot of traffic" says so. What is clear from this page, which has been racking up crypto kills since 2010, is that no matter how many bitter fights, billions of dollars lost, regulatory crackdowns or speculative manias happen in the growing cryptosphere, its most popular assets are not ready, as one critic put it, to just die already.
Crypto isn't just Bitcoin, of course. Far from it. But the way people feel about Bitcoin can be a good indicator of how people feel about crypto in general. Since 2010, the rise in the price of Bitcoin has been closely linked to the creation of new crypto hedge funds. Bitcoin is still the cryptocurrency that is traded the most. This rule stays in place until 2022. In this year's annual survey of the sector by PwC, the number of new crypto hedge funds was the lowest it has been in five years.
The survey also found that there could still be more than 300 crypto hedge funds around the world, with half of them starting up in the last three years. Those who make it through the crypto bloodbath of 2022 will be able to brag about it for years to come. They will also have a lot more money, which is another arrow in their quiver.
Based on the same group of funds, PwC says that the average assets under management for crypto hedge funds in 2021 were $58.6 million. This was an increase of nearly 60% from the previous year and put them well above the $20 million threshold that is considered a critical mass for traditional hedge funds. In other words, crypto hedge funds had a lot of money when the year started, and many of them are likely to make it through the rough times.
Crypto's stubborn refusal to die has made a lot of people angry and led to a lot of scathing speeches. "All manias end the same way: with a sharp correction that brings prices down like a house of cards. In short, it's another case of greed overpowering fear until it's too late to do anything but panic, according to a report on the dangers of "cryptomania" released this month by the Brookings Institution, a non-profit Washington think tank.
But the latest washout shouldn't be called a panic because it hasn't happened that quickly or only for a short time. It would be more accurate to call it a months-long grind with disastrous price swings that have pushed crypto assets further away from their $3 trillion high-water mark from early November 2021, almost a year ago. Around the same time last year, Bitcoin's market capitalization also hit its all-time high of $1.28 trillion. It has since fallen a long way from that high point. It is now worth about $370 billion and trades at just over $20,000, staying in a tight range for the past month.
Brookings found that "oversized monetary and fiscal impulses in core economies" were partly to blame for the rising prices of what it called "the bubbling pandemic years." However, it put most of the blame on "uninformed investors" who liked disruptive innovations, wanted easy, fake profits, and had blind faith in paradigm shifts that "will supposedly sustain the momentum over time, often seasoned with abundant global liquidity."
It's not enough to just kick crypto when it's down. Many people in the financial world have been angry for a long time, but they have kept it to themselves because they had to get along with crypto-focused clients and partners. When Russia invaded Ukraine, it led to a rise in bad people using cryptocurrencies to get around financial sanctions. On Wall Street, people were grumbling behind closed doors. Had the U.S. missed its chance to crack down on crypto before it hurt national security? A recent report found that this isn't the case. It's not surprising that crypto isn't liquid enough to be used on a large scale to get around sanctions. But crypto did get people all over the world to donate more than $60 million to Ukraine in the first few weeks after the invasion. This money helped the Ukrainian government buy desperately needed military equipment and medicine.
That doesn't mean that crypto assets should be allowed to rule wild and free. A letter sent to members of Congress earlier this year by more than 1,500 technologists, scientists, and academics from a long list of companies and institutions, including Google, Microsoft, Amazon, Facebook/Meta, the Massachusetts Institute of Technology, the University of Pennsylvania, the University of California, Berkeley, and many others, is perhaps one of the most convincing criticisms to come out of this latest crypto winter.
"The catastrophes and externalities related to blockchain technologies and crypto-asset investments are neither isolated nor the growing pains of a new technology," the letter says. "They are the natural results of a technology that wasn't made for its purpose and will never be good enough to support large-scale economic activity."
The group asked lawmakers to act quickly to improve oversight of fintech and to "be critical and skeptical of industry claims that crypto assets are an innovative technology that is unquestionably good" and to "make sure that people in the U.S. and elsewhere are not left vulnerable to predatory finance, fraud, and systemic economic risks."
A letter like this, along with the crash of cryptocurrencies, rising interest rates, inflation, fears of a recession, and the long list of spectacular flameouts, bankruptcies, and frauds that have happened this year, should be enough to kill any institutional interest in cryptocurrencies and digital assets for good. But not yet. Institutional investors, on the other hand, are actively looking for their next entry points into the market. They are sure that the market hasn't seen the last of its bonanzas yet, which is shocking.
The Brevan Howard Digital Asset Multi-Strategy Fund, which is the crypto and digital asset division of the $25 billion U.K. hedge fund, has raised more than $1 billion from institutional investors as of this summer. This is one of the biggest crypto hedge fund launches to date and goes against the crypto doldrums.
Also, Institutional Investor has heard from people who know about Brevan Howard's crypto fund that BH Digital, which handles Brevan Howard's crypto trades, is still getting a lot of requests from institutional clients to join the fund, which was started in January. One well-connected Wall Street source who helps clients find each other says that there are still a lot of investors looking to put money into BH Digital, which could easily get the company to the $2 billion mark.
About 85% of Brevan Howard's crypto fund came from funds of funds, family offices, high-net-worth individuals, pensions, and endowments (roughly in that order). About 15% of the crypto-trading unit's funds came from Brevan Howard itself.
BH Digital started doing business in September 2021. It plans to invest in a "wide range of different opportunities presented by the structural disruption and innovation of blockchain technology" while imposing strict controls, institutional governance, risk management, and expertise that are native to crypto markets. Brevan Howard has hired more than 60 people to work in eight offices around the world as portfolio managers, analysts, quants, and data scientists. Already, the fund is getting a lot of praise for how well it has avoided the worst crypto losses this year.
Jeff Howard, head of North America institutional sales and business development at OSL, a Hong Kong-based crypto broker and exchange, says that institutional investors aren't just interested in crypto because of Brevan Howard's success. "Institutional investors are very optimistic about crypto right now as we head into fall," he says. "They are happy about the sell-off, especially those who did well, because it took leverage out of the market and gave them a good place to get in."
Howard says that at OSL, August and September were "two of the biggest volume months of the year." Compared to the same time last year, volume in cryptocurrency was up 250%, with institutional investors leading the way. However, volume was nowhere near what it was from February to June, when it was as high as $220 billion a month. So far, the amount of crypto that has been traded in October has been just over $180 billion. Individual investors are leaving the market, while institutional investors are slowly getting back in.
Howard says that institutional investors are taking a strategic approach to getting back into the cryptocurrency market, which makes it hard to time the market. He says, "The crypto industry has never been around when interest rates were going up. Think about that." "There are so many unknowns that it will be hard for crypto to go up. People are looking for an up or down signal to tell them what to do next, but there are a lot of mixed messages.
In the meantime, lower prices are giving crypto investors and businesses a chance to take a break and reevaluate. Many are using this time to plan for the next growth phase. Howard says, "I talk to private trading firms, market makers, and hedge funds." "And they are working hard right now to grow their crypto businesses."
As one industry source put it, the hope is that the new year will offer a fresh start, some clarity on the direction of the market, and a chance for existing funds that made it through 2022 to say, "We did well, we didn't blow up, and we are set up to survive a crypto meltdown."
So, is crypto dead?
Cryptography is not over. It also doesn't look like it could, would, or should be shut down at any point. Still, there are two things that could make it a bad investment for you. First of all, you might not think the risks of crypto are worth taking. Crypto is a riskier investment than other traditional asset classes.
And you might like it less if one of its best features is that there aren't many rules and it's not centralized. At the moment, it looks like the area will continue to have more rules put on it. It will be interesting to see what this means for how the asset class grows. At the moment, you could argue either way about whether this means more people will use it in their daily lives or whether it will become much less popular among investors.
In the end, crypto is not dead, but it looks like it will remain a controversial type of investment for many reasons. But this is true of all assets. For an asset to be sold, the person who owns it must no longer want it because of the risks and bad things that come with it. For someone to buy it, they must think that the possible benefits are worth the risks. This is the way all capital markets work. Just that cryptocurrency seems to be getting a lot of attention in the news right now. Tune out all that noise, get back to the basics, and figure out if it's a good investment for you based on your own situation.