Crypto’s rocky year
The industry was hugely optimistic when Donald Trump returned to the White House. But bitcoin has fallen by a quarter in two months
George Steer and Jill R Shah in New York and Nikou Asgari in London
© FT montage/UnsplashThere were few obvious signs of the crypto market’s malaise at a lively Christmas party hosted on Wednesday by industry cheerleader Anthony Pompliano at New York’s Freehand Hotel.
Enjoying the crudités and free booze were lobbyists, investors and even an individual selling bitcoin-denominated life insurance.
“We see this as a healthy pullback in crypto and bitcoin,” Cantor Fitzgerald crypto analyst Brett Knoblauch said in a note to clients, adding that he expects bitcoin’s price to eventually rise above $1.5mn per token — 16 times its current value.
But the speed and scale of the recent sell-off, which has seen bitcoin lose a quarter of its value in two months, has sparked fresh troubles elsewhere.
Speaking on Monday, Phong Le, chief executive of Strategy, a so-called bitcoin treasury vehicle that has accumulated 650,000 bitcoins over the past five years, warned of an impending “bitcoin winter”.
It was a reference to the market’s last major downturn, following the collapse in 2022 of Sam Bankman-Fried’s crypto exchange FTX.
Explanations for the sell-off — more than $1tn has been erased from the combined capitalisation of about 18,000 digital tokens over the past two months — range from uncertainty surrounding the path of US interest rates to concerns about lofty tech stock valuations that have spilled over into other risky assets.
Bitcoin’s slide from a peak just below $126,000 on October 7 to just over $84,000 on Monday and around $89,000 on Friday, is all the more startling given the extent to which US President Donald Trump has rolled out the red carpet for the crypto industry since his return to the White House in January.
In the past 12 months, Trump has installed crypto-friendly leadership at the main US regulatory agencies, pardoned several crypto executives who had pleaded guilty to criminal charges and mandated the creation of a national bitcoin reserve, all while his family has amassed more than $1bn in pre-tax profits from its expanding crypto empire.
Despite a strong rally in the spring and summer, bitcoin is down 4 per cent this year.
Three years ago, traditional finance was relatively insulated against the crypto market’s ructions.
But bitcoin’s subsequent recovery and move into the mainstream — a BlackRock exchange traded fund owns about 780,000 bitcoin and JPMorgan Chase is considering lending against clients’ crypto holdings — means that severe sell-offs today sometimes bleed over into other markets.
One institution that increased its stake shortly before the market slump was Harvard University, whose roughly $442mn stake in BlackRock’s iShares Bitcoin Trust ETF constitutes its largest publicly disclosed US holding, filings show.
Pain has been more widespread as a result.
“Unlike prior crashes, driven primarily by retail speculation, this year’s downturn has occurred amid substantial institutional participation,” said Deutsche Bank analysts Marion Laboure and Camilla Siazon.
As the crypto market has expanded over the past three years, the bouts of volatility to which it is prone have become harder to ignore.
The question of whether its recent decline is a harbinger of trouble for broader financial markets has taken on added significance at the end of a year marked by rising geopolitical tensions and persistent worries about a bubble in Big Tech stocks.
“The linkage between bitcoin and [Wall Street’s blue-chip] S&P 500 is strange, but it exists,” says Mike Zigmont, co-head of trading at Visdom Investment Group.
“We’re all bitcoin investors for a while, it seems.
I don’t like it but I can’t change it.”
Like so many market wobbles this year, the spark for the recent crypto slump was a tariff announcement by the president on Truth Social.
Trump’s threat to impose additional tariffs of 100 per cent on China on October 10 consigned the S&P 500 to its worst daily decline since April, when asset prices were hit by Trump’s initial “liberation day” tariffs.
Crypto prices collapsed in the minutes after Trump’s post as panic swept through markets.
The average decline on the day of the roughly 10,000 tokens tracked by data group CoinDesk reached 47 per cent, liquidating over $19bn in leveraged trades and erasing $500bn of value over the course of a few hours.
What ended as the crypto market’s worst ever one-day sell-off is now ruefully referred to by some investors as “10/10”.
Autopsies carried out since then suggest that much of the damage can be traced to investors having piled into financial products known as perpetual futures.
So-called perps allow traders to make highly leveraged bets, up to 100-to-1 on some crypto exchanges, to boost their returns on market moves.
Thousands of these bets were violently unwound as bitcoin and other tokens began to slide late on October 10. Market makers — who ordinarily buy securities from sellers and sell securities to buyers to provide much-needed liquidity — pulled back at the same time, according to analysts, amplifying price volatility in the process.
The 10/10 sell-off “exposed a fundamental weakness in crypto’s infrastructure”, says Adam Morgan McCarthy, a research analyst at data provider Kaiko.
With market makers suddenly absent, “no one really knew the true value of any cryptocurrency, because prices varied so widely from one platform to another”, he adds.
As investors counted up their losses, broader macroeconomic concerns subsequently conspired to prolong the crypto market’s slump.
In late October, growing doubts about whether the US Federal Reserve will lower interest rates when it meets next week added to concerns surrounding the sky-high valuations attached to the Silicon Valley tech companies at the forefront of the artificial intelligence investment boom.
Lower rates, which reduce how much investors can earn from holding short-term US government debt, render risky assets like crypto tokens marginally more attractive.
Bitcoin rallied in 2020 as the Fed lowered borrowing costs and slipped two years later as the US central bank raised rates to curb inflation.
“People view crypto as a riskier asset class.
If investors are feeling squeamish and they want to pull back, they’re going to pull back from crypto first,” says Laura Katherine Mann, a partner in White & Case’s Americas Capital Markets Group.
If sophisticated crypto traders using exotic derivatives drove the digital asset sell-off in October, then it was mom and pop investors, who typically buy and sell tokens at their market price or through ETFs, that were “mostly responsible for the continuation of the crypto market correction in November”, JPMorgan analysts argued in a note to clients.
Withdrawals from digital asset ETFs in November hit $3.5bn, eclipsing a previous record set in February, Morningstar data shows.
That coincided with a rough patch for dozens of so-called meme stocks popular with retail traders.
Analysts say crypto’s influence on the stock market was on display as recently as Thursday, when bitcoin fell sharply at around 2pm eastern time and the S&P 500 followed suit moments later.
On November 17, an index that tracks US tech stocks appeared to follow bitcoin’s trajectory for most of the trading session.
“It is truly the tail wagging the dog when a $1.8tn market cap speculative asset is significantly influencing a $32tn market capitalisation index,” says Mike O’Rourke, chief market strategist at Jones Trading, referring to the value of the Nasdaq 100 at that time.
“It’s alarming to see the index, with its highly concentrated exposure to the largest and most influential companies in the world . . . take cues from bitcoin,” he adds.
Over the past decade, predicting bitcoin’s demise has proved an exercise in tempting fate.
Unsurprisingly, it is hard to find a single crypto investor who does not think that bitcoin will eventually climb to fresh record highs.
This week, BlackRock’s Larry Fink noted that sovereign wealth funds had bought the dip by snapping up bitcoin while it traded just above $80,000, in a sign that parts of the investment community remained bullish even as prices fell to their lowest level in eight months.
In July, the US House of Representatives passed landmark legislation to regulate stablecoins, tokens mostly pegged to assets including Treasuries and the US dollar, as well as an act that sets out a framework to determine whether digital assets should be considered securities.
If and when they are passed by the Senate, crypto insiders expect both pieces of legislation to add fresh momentum to the broader market.
“Bitcoin’s correction looks more like a reversion than a collapse,” says Alex Thorn, head of research at crypto group Galaxy Digital.
Sceptics contend that few lawmakers in Washington have addressed the crypto market’s structural weak points, several of which were laid bare on October 10.
As panic set in, traders rushed to buy USDT, a $184bn stablecoin operated by Tether, by far the world’s largest stablecoin issuer.
“USDT was the most traded asset during [the October 10] crash, reflecting its role as the deepest source of liquidity,” says Kaiko’s Morgan McCarthy.
Tether’s ability to prop up the broader market and maintain its peg to the US dollar was called into doubt late last month, when S&P Global Ratings downgraded the reserves held by the stablecoin operator as collateral for its token.
In a widely read note, the rating agency flagged “an increase in high-risk assets” backing the stablecoin, with corporate bonds, precious metals, bitcoin and secured loans accounting for almost 24 per cent of total reserves at the end of September, up from 17 per cent a year ago.
S&P added that Tether had “limited transparency on reserve management and risk appetite, lack of a robust regulatory framework [and] no asset segregation to protect against the issuer’s insolvency”.
Tether said it “strongly disagrees with the characterisation presented in the report”.
The company has yet to provide a full audit of its reserves, but its public statements show that 77 per cent of them are in US government bonds and other low-risk bills.
“That’s terrifying,” says a board member at a smaller stablecoin issuer.
“The number should be like 98 per cent, plus.”
“Stablecoin issuers need to be buying nothing but short-term securities,” the person adds.
“A Tether collapse would topple the whole house of cards, the contagion effect across the whole [crypto market] would be massive.”
0 comments:
Publicar un comentario