REBOUND: Crypto assets are the world’s best performers this year, with Bitcoin (BTC) up 25%. Strength is being driven by the less-bad macro environment, with competition from 5% Fed funds rate to ease. And being helped by crypto becoming a very small and out-of-favour asset class after last year’s plunge. Micro pressures remain after FTX’ collapse and crypto has never faced a long recession. But this obscures plenty of silver linings. From ecosystem development, to rising retail interest, the coming Bitcoin ‘halving, and regulation and institutional catalysts.
TOP-DOWN: The less-bad US inflation and interest rate backdrop has been enough to release crypto pressure. The asset class market cap had fallen well below $1 trillion. It’s correlation with equities, and tech stocks, had plunged into negative territory last year but has been recovering this. An outlook of less competition from a 5% Fed funds peak has helped no-yielding assets, from Bitcoin to gold. But risks remain high with this young asset class having never faced a long-lasting economic recession or equity bear market and with market volumes still very low.
BOTTOM-UP: Collateral damage from the 2022 crypto winter and Luna and FTX collapses has continued, with bankruptcies, layoffs, and falling investment. Yet it is not as bad as it seems. Asset class development continues, with underlying VC and PE investment still robust (see chart) and the ETH ‘merge’ next step (Shanghai upgrade) coming soon. Whilst more traditional positive catalysts are on the horizon. The next bitcoin ‘halving’ is due to cut supply in Q1 2024, and exchange reserves are already near record lows. Retail investors are also taking more interest. Our global retail survey shows 39% own crypto, with female and older investor interest growing. Longer term, more regulatory guard rails should attract greater institutional interest.
All data, figures & charts are valid as of 19/01/2023