Have the record summer temperatures fried investors’ brains? On August 11, BlackRock, whose chief executive described bitcoin in 2017 as an index for money laundering, launched a private trust for US institutions to invest in it.
BlackRock cited substantial interest from institutional clients despite the recent steep falls. From a peak in November 2021 of $2.96 trillion, the market capitalization of all cryptos fell 72% to just $836 billion in June 2022, as rising rates brought down all markets. The Nasdaq fell 32% over the same period.
As investors somehow convinced themselves that the Fed has got on top of inflation (it hasn’t) and will soon start cutting rates (it won’t), cryptos rallied.
Price moves in crypto reflect a speculative bet on whether or not it will one day have a core place within the financial system
By mid-August, the overall market was down just 60% from its all-time high, while the Nasdaq was back to just 19% down. Bitcoin, which hit $68,000 in November and fell to $19,000 in July, recovered to $24,000 in mid-August.
This recovery came while almost every day a new hack emptied holders’ wallets on a bridge from one network to another, a crypto exchange stopped trading and froze customer withdrawals, and the crypto winter spread.
It will take some time yet to thaw from the collapse of the Terra stablecoin and the bankruptcy of crypto lender Celsius.
Cryptos have no valid use case. They are not a medium of exchange. No-one uses them to pay for anything. They are not an inflation hedge. As inflation soared, they collapsed.
Price moves in crypto reflect a speculative bet on whether or not it will one day have a core place within the financial system. Institutional investors appear to be betting on whether or not they themselves will take the stuff seriously.
A correlation canary?
Betting shop owners don’t tell punters to gamble their money on any particular horse: they just want us to place our bets with them. At the start of August, Coinbase, the crypto exchange which listed its shares on Nasdaq in April 2021 at $250 and saw them shoot up to $381, announced a tie-up with BlackRock’s Aladdin investment management platform.
Coinbase Prime will provide crypto trading, custody, prime brokerage and reporting capabilities to Aladdin’s institutional client base who are also clients of Coinbase.
BlackRock’s clients, we know, are increasingly interested in gaining exposure to digital assets. If institutions decide to make that gamble, BlackRock will help them to efficiently manage the operational lifecycle of those assets.
In late August, markets began selling off again: the Nasdaq down from 13,047 on August 12 to 12,466 on August 22; all cryptos down from $1.18 trillion to $1 trillion; bitcoin from $24,800 to $21,200. Coinbase shares changed hands at $72.
Regulators must stay alert to the interconnection between cryptos and financial system stability. In Asia, for example, the International Monetary Fund has noted increased adoption of cryptos by institutional investors as well as by retail, and sees worrying trends in correlation between asset classes.
With a perfect correlation indexed at 1.0, correlation between bitcoin and Asian equity market returns has increased sharply from before the pandemic: from 0.03 up to 0.31 for Indian equities; from 0.07 to 0.34 for Thai stocks; and from 0.01 to 0.30 in Vietnam. Correlations in volatility are even higher: up to 0.44 in India and 0.59 in Thailand.
If large losses in crypto transmit in future into conventional markets, regulators will have to decide whether the blame lies entirely with investors themselves or with their enablers.
