A relative cryptocurrency veteran at the age of 24, Abhishek Maran has seen the price of his digital tokens rise and fall on sentiment, hype, pump and dump scams and genuine innovation.
Having discovered cryptocurrencies in 2015 and begun investing two years later, his gradual investment of about $12,000 is now worth roughly $70,000. It’s an impressive return, but much less than it would have been before cryptocurrencies lost about half their value in recent months. However, Maran remains largely unfazed.
“A lot of it [the investment in cryptocurrencies] was juiced up by the printing that was done and stimulus checks that were given out [during the pandemic],” he says. “And now that’s stopped, people need money to live.”
For the crypto community as a whole, Maran sees a silver lining. “It’s actually a good thing for the space because it weeds out a lot of short-term or short-sighted people.”
It’s a common line among crypto enthusiasts, as major crashes are a regular occurrence in the highly volatile space. But the recent downturn – which has seen the price of Bitcoin plunge more than 40 per cent – has occurred in tandem with falls in global markets as worries over inflation, the pandemic and rising interest rates rattle investors.
In years gone by, such jitters would have barely shaken Bitcoin and other major cryptocurrencies, which are often touted as independent hedges against the king of standard equities, operating away from the gaze of regulators, banks and stuffy fund managers with their carefully balanced portfolios.
If we look 50 years out… Bitcoin becomes much more of a gold-like asset.
But in recent months, Bitcoin has become bound, at least for the moment, by the same cold financial arithmetic governing other technology stocks and equities. Its price has risen and fallen in lockstep with major US indices such as the tech-heavy Nasdaq, and where Bitcoin goes, the rest of the crypto market follows.
It’s a curious phenomenon for a sector that has so long held out as an exception to the traditional finance world, but one that some expect to become the norm as waves of institutional investment forces Bitcoin to mature into a more ‘traditional’ asset.
An unlikely pairing
Bitcoin’s correlation with major US stock indices has ebbed and flowed over the years, but has been particularly notable in the past few months. Since the beginning of December the Nasdaq has fallen 12 per cent, and Bitcoin has fallen 35 per cent. On Monday, US stocks made a last-minute surge late in the session to end the day positive. So too did Bitcoin, rallying 12 per cent in a matter of hours.
Data compiled by Bloomberg shows that over the last 40 days, the correlation coefficient between Bitcoin and the Nasdaq 100 nearly reached 0.66, the highest level of correlation since 2010, indicating the two often move in the same direction.
This recent coupling is representative of the cryptocurrency entering its next ‘phase’ as an asset, according to Adrian Przelozny, co-founder of major Australian crypto exchange Independent Reserve.
In previous years, Bitcoin’s relative obscurity and the prevalence of single investors with massive, market-moving holdings (known as whales) drove much of the volatility for the asset.
“Early on, no one really knew what kind of pricing model to use, or what the value of one Bitcoin was. The ways you assign values to stocks didn’t really apply to cryptocurrencies,” he says.
“As it evolved, people have started looking at cryptocurrencies as a technology that can be valued by what utility it will have in the future, similar to how technology stocks are valued.”
Richard Galvin, founder of crypto-focused investment firm DACM, agrees, telling The Age and The Sydney Morning Herald early Bitcoin investors would have only been investing in crypto, rather than current investors who likely have a range of stocks and assets in their portfolios.
“Most of the people back then that were interested only in Bitcoin and trading Bitcoin, it’s not like they were swapping between Bitcoin and treasuries,” he says. In other words, it was a cult favourite.
“Now it’s been picked up by a lot of those macro traders and major hedge fund traders, so it sits in a portfolio alongside traditional assets and becomes a traditional allocation question. Do I up my weight to Bitcoin and sell my emerging market equities?”
“That forces it to be more correlated with what’s going on in the broader world.”
These fund managers applying their existing pricing models to cryptocurrency assets have driven some correlation between the two. The linkage is also driven by the global appetite for risk, Galvin says, as crypto assets tend to thrive in a frothy market where investors are hungry for growth, rather than the subdued, cautious approach taken by many currently.
“If the Nasdaq is flat, crypto does pretty well because it wrinkles off its own growth, and if the Nasdaq is strong, crypto probably goes even better,” Galvin says. “If the Nasdaq falls dramatically, then people go risk-off and crypto is not immune, which is what we’re seeing now.”
At golden time
In unfortunate news for Bitcoin purists, both Przelozny and Galvin expect this correlation will continue over the medium term as cryptocurrencies continue to mature and gain interest from the traditional finance crowd.
But both believe eventually, Bitcoin will gain the status of ‘digital gold’ and will act in much the same fashion as its physical counterpart, gaining and losing value in response to macroeconomic and geopolitical moves rather than the fluctuations of everyday markets.
This will require the asset’s adoption curve – how easy it is to use and trade – to improve, Galvin says, but once that happens he envisions Bitcoin taking up the same space in portfolios that gold currently does.
“If we look 50 years out, and if the adoption curves eases off, it becomes much more of a gold-like asset,” he says.
Bitcoin’s dominance in the $2 trillion crypto market, where it accounts for 42 per cent of the market capitalization, means that by and large, whatever it does, every other cryptocurrency follows. Prices of coins such as Ethereum, Cardano and Solana have all mirrored Bitcoin, which in turn has mirrored the Nasdaq.
I don’t like to look at the prices, it encourages short-term mindedness.
Crypto investor Abhishek Maran
“Bitcoin is by far the biggest and most widely held crypto-asset, so when its price falls, investors often sell off other speculative crypto-assets,” Josh Gilbert, crypto analyst at eToro trading platform says.
“It sets the tone for the crypto market, and with a 42 per cent market dominance at the time of writing, its price action is always likely to be replicated across other crypto-assets.”
This is unlikely to be the case forever though, as other assets inevitably gain prominence and decouple from Bitcoin, and the adoption curve for investing in them reduces.
Maran, the crypto watcher who is building a community for people interested in the space in the Asia Pacific called DAO Under, is philosophical. He’s still doing fine in absolute terms, cryptocurrencies have crashed before and, Maran says, there is still revolutionary potential in the technology.
With a friend, he’s creating an online community called DAO Under for people in the Australia-Asia Pacific region interested in building apps based on similar decentralized technology to that powering Bitcoin.
“I don’t like to look at the prices, it encourages short-term mindedness.”
Another investor, aged 30 and based in Melbourne, who wanted to remain anonymous because he is leery of discussing his wealth publicly, was sitting on about $1.3 million in crypto assets before the crash. It is now down to about half that, yet for the moment he has no plans to sell out.
“For the most part, since I bought it [largely in 2014] I’m surprised at my ability to compartmentalise and not get too hung up on the swings,” he says. “I’m the opposite with my share portfolio, swings in that I can lose sleep over, but with crypto I’m like ‘eh, whatever’.
“It almost doesn’t feel real.”
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