Our approach to Bitcoin and other cryptocurrencies has been modelled over the years to align with our stance on frontier stock markets, such as Morocco and Kazakhstan. These assets may afford opportunity for some, but they require specialist knowledge that may be a bridge too far for most global investors. We never felt a need to defend our position. At the beginning of 2020, the total market capitalization of Bitcoin was smaller than the Vietnamese stock market.
The pandemic, admittedly, derailed that view as Bitcoin began to see a flood of interest, most notably from institutions, peaking with a unit value of more than $68,000 in November 2021. For the record, that price gain represented more than a 1200% increase over a pandemic-era price low in March 2020.
What has happened over this two-year period is that Bitcoin turned into something akin to an investible asset, with a market price determined by a growing volume of institutional-quality names seeking short-term financial gain. The good news is a deeper, more fluid Bitcoin market will provide heft to an ecosystem that will benefit all cryptocurrency enthusiasts, including features like stronger regulation, more intermediaries, and better investment research.
The ecosystem, however, is now teetering. As a prominent example, Coinbase—the publicly-listed cryptocurrency exchange—saw its stock price collapse by more than 70% in the first five months of this year. While it may not be fair to single out Coinbase as the flag bearer for the entire cryptocurrency space, the company has been called the “King Midas of Crypto.”
There are two factors provoking the downward price spiral in cryptocurrencies:
Global Fundamentals: Just as investors off-load positions in frontier markets quickly in times of crisis, so too will they limit exposure to most high-risk assets, like cryptocurrencies. Bitcoin specialists may be reluctant to admit that their focus is still marginal to global financial markets, but the description remains appropriate for a business where the market capitalization of all cryptocurrencies, including Ethereum and Tether, is maybe the size of the South African stock market.
Portfolio Management: Because of the prospect of even higher interest rates and weakness in the global economy, the sell-off in Bitcoin aligns with the sell-off in tech stocks this year. The obvious reason is that institutions have bought Bitcoin without a distinct allocation mandate, parking the assets in the technology component of their investment portfolios. When economic fundamentals indicate that it is time to sell growth stocks, cryptocurrencies are caught in the mix.
At least for now, it would be naïve to suggest that institutions generally have a dedicated cryptocurrency allocation. That feature may be at least a decade down the road. For context, any institution that participates in frontier stock markets, aside from highly specialized players, likely masks those positions in a bigger commitment to global equities. We have not seen this change in thirty years. In a similar vein, cryptocurrency exposure is held alongside tech-stocks in tradeable portfolios.
We assuredly will track developments in digital assets over time. However, in line with the tight correlations we have seen between cryptocurrencies and tech stocks this year, we are unwilling to aggrandize their role as an independent asset class, somehow removed from bigger financial-market issues. ■
Our Vantage Point: The decline in the value of Bitcoin and other cryptocurrencies is indicative of pressing issues in the global backdrop, amplified by the reality of the portfolio-management business.
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