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Recent events, such as China’s ban on Bitcoin mining, may be “long-term positives for the market even if they introduce short-term volatility.”
Because BlackRock is the world’s largest asset manager, its CEO, Larry Fink, recently stated that he was seeing “very little in terms of investor demand” for crypto and Bitcoin (BTC) based on “my last two weeks of business travel,” it raised some eyebrows.
A lively Twitter discussion followed one commentator’s remarks of how BlackRock was simply protecting its legacy bond business, given that “Goldman Sachs, BNY Mellon, State Street, Morgan Stanley, all entered the space in response to demand.” Furthermore, BlackRock is the second-largest owner of MicroStrategy (MSTR) stock, regarded by many as a pure Bitcoin play.
As previously reported, Bitcoin reached an all-time high of $64,000 on April 14 before plummeting, and it has now been trading at roughly half its April high for weeks, as have many other cryptocurrencies. It’s understandable that some users are concerned.
Moving beyond market cycles
Perhaps it is better to adopt a longer-term view regarding recent events. “Two months is a very short time period in crypto,” Bitwise chief investment officer Matt Hougan explained to Cointelegraph, adding, “I’m not sure what to make of Fink’s comments, except that they don’t align with our day-to-day experience.”
“Institutional investors take 12–36 months to do due diligence,” Jeff Dorman, chief investment officer of digital asset management firm Arca, told Cointelegraph, adding further, “They aren’t timing market cycles. They are trying to get comfortable with the asset class to make a 10-year-plus commitment.”
“It’s important to remember that the market is up more than 200% in the past 12 months, making it the best-performing asset class in the world over the last year,” added Hougan, who claims to see continuous inflows into Bitwise.
Furthermore, crypto and blockchain technology is a global phenomenon, and one must be cautious when drawing global conclusions from events in the United States or Europe. For the record, BlackRock is headquartered in New York City. “It doesn’t feel like a crypto winter here in Asia,” said Justin d’Anethan, head of exchange sales at Singapore-based EQONEX.
“While prices falling have definitely dampened some of the enthusiasm, we’re still seeing a clear interest for crypto and crypto- and blockchain-based ventures. If anything, the stagnation in the lower 30,000’s was/is seen by many as an opportunity to get in.”
In other news, Emin Gün Sirer, a Cornell University professor and the creator of the Avalanche blockchain protocol, recently stated that hedge funds aren’t the only institutional players dabbling in cryptocurrency these days: “I’ve been getting contacts from retirement funds, […] far slower-moving but with perhaps ten times more dollars under their control, and they are gradually entering the crypto space.”
Also, Fidelity Digital, an institutional pioneer in the crypto space, has been aggressively expanding lately — boosting staff by 70% due to “strong crypto demand,” including 100 new workers in Dublin, Boston and Utah, as Fidelity Digital president Tom Jessop told Bloomberg. The firm sees more demand from retirement advisors as well as companies, and it is broadening its product offerings accordingly. “We’ve seen more interest in Ether, so we want to be ahead of that demand,” said Jessop. Megan Griffin, a Fidelity Digital spokesperson, told Cointelegraph:
“We haven’t seen a material change in [crypto] demand during the [post-April 14] drawdown, given institutions tend to hold a long-term view and are experienced in managing through cycles.”
Dorman was even more emphatic. “The interest in digital assets from new investors has accelerated — not slowed down,” he said. “Any slow down with allocations is more a function of summer than it is price.”
A boom-and-bust dynamic?
Still, there are valid reasons why the demand for crypto could be seen as faltering. “There is little doubt that the boom and bust dynamics of the past weeks represent a setback to the institutional adoption of crypto markets and in particular of Bitcoin and Ethereum,” a JPMorgan strategist said in a report in June.
“Of course, the crypto markets have indeed been going sideways,” Lex Sokolin, head economist at ConsenSys, told Cointelegraph, adding, “The drivers are some combination of pushback to mining, global macro risk-off trends and momentum slowing on sentiment/meme trading.” But the underlying fundamentals are solid, Sokolin continued:
“We see immense demand from institutional investors for both crypto assets, as well as the equity of crypto companies. We can point to the $18-billion valuation of FTX and $9-billion valuation of Bullish as recent evidence, both funded by some of the world’s largest hedge funds.”
According to Hougan, the events that have occurred since the beginning of the summer have caused some investors to slow down and conduct a bit more research. China’s ban on Bitcoin mining, which came at a time when US authorities appeared to be stepping up efforts to regulate cryptocurrency, forced investors to “pause and reflect.” The good news is that both of these developments, while introducing short-term volatility, are long-term positives for the market.”
Nonetheless, the recent roller coaster ride serves as a reminder that BTC and crypto in general have yet to solve their volatility problem. “Volatility scares everyone,” Dorman observed, adding, “Volatility is more accepted when you trust the underlying asset’s value — that’s the biggest hurdle with institutional investors in terms of their education.”
Dorman has noticed only one significant shift in recent months: “new investors are far more interested in DeFi, gaming, and other cash-flow producing assets than they are in Bitcoin or Ethereum — or ETH competitors.”
“Decentralized finance continues to mature and process transactions and loans,” said Sokolin, adding: “NFT-based platforms are seeing major studios and creators shift to new tokenized business models. Computational chains like Ethereum are clearly having a moment. It is also possible that we will see more DeFi-type activity anchored to Bitcoin, Solana or other chains, and that will grow the entire pie.”
Playing the “long game”
However, crypto continues to face difficulties. “We expect to see significant new activity on the U.S. regulatory front, for example, and if regulators over-reach, that could have a material negative impact on crypto,” Hougan said, adding, “Of course, the flip side is also true: If regulators put forth balanced regulation, that would lay the groundwork for the next great crypto bull market.”
Many of crypto’s technological challenges, such as scalability and transaction speed, have “already been looked at and somewhat resolved,” according to D’Anethan, but there is still a need to find the right balance between “network effect” and efficiency, noting:
“BTC is a well-accepted crypto but, technologically speaking, is not the best user experience. A new cryptocurrency might be great, but if nobody uses it, it doesn’t do much good. This is a self-balancing act that still needs to play out.”
Overall, long-term trends remain positive, suggested Dorman, “We are in a multi-decade secular uptrend. […] Every single near-term challenge is a long-term positive — regulation, China dispersion, etc.,” while Sokolin, for his part, called attention to a “deep investment in the digital asset long game by sophisticated participants that is happening now.”