Need to catch up with Crypto events? here is a great summary
After initial months of price spike and all-time highs in 2021, the crypto market plunged heavily, wiping out around $1.2 trillion of market capitalization. Every coin, ranging from large caps like bitcoin and Ethereum to smaller caps like Fantom plummeted. Since then, the crypto market is witnessing continued volatility. Such ebb and flow in crypto market has shaken the investors’ confidence and raising questions about their risks as investments and viability as financial assets.
On April 13, 2021, the world’s biggest cryptocurrency, bitcoin soared to an all-time high of $63,000, recording a year-on-year growth of 827% and year-to-date gains of more than 116%. Bitcoin exploded in the initial months of 2021, spreading across industries as they realize its real-world applicability beyond an investment tool. Indeed, the year 2021 has been phenomenal for cryptocurrencies, as many big players in the corporate world have embraced the adoption of digital currencies. Over the past few years, we have also witnessed the institutional investments pouring over the crypto space and accelerating the demand for blockchain technology. There has been a recent rush of major corporations and financial institutions including MicroStrategy, BNY Mellon, MasterCard, and PayPal, announcing cryptocurrency proposals. In 2020 as well, several significant investors, hedge funds, and companies began to buy digital assets or signal their preference of buying them in the near future.
There has been unprecedented adoption of bitcoin by Institutions and institutional investors as witnessed in 2021, which has resulted in nearly 3% of all bitcoin circulating supply being locked up by these investors. According to a survey conducted by London-based crypto fund Nickel Digital Asset Management, in January 2021, over 85% of institutional investors holding Bitcoin plan to increase their allocations over the next two years, as they consider Bitcoin as a hedge against widespread inflation and currency debasement, as the pandemic has induced a steep rise in currency printing by the world’s largest central banks.
GrayScale, the world’s largest crypto custody service for institutions, added over 43, 000 BTC and 130,000 ETH in 2021, bringing its total holdings to over $43.3 bn in value ($36 bn BTC and $5.8 bn ETH). In 2020 as well, 87% of Bitcoin Investments in GrayScale came from Institutional Investors, dominated by asset managers. Further, the company announced to add 23 digital assets including Chainlink, Polkadot, Cardano, Aave, and Tezos, among others.
GrayScale noted that: “The average commitment among institutions is also growing at a significant pace. The average commitment from institutions was $6.8 million in 4Q20, up from an average of $2.9 million in 3Q20.”
Talking straight, the real stir was caused by Elon Musk, with his announcement of Tesla buying BTC worth $1.5 bn during early February. The crypto markets touched new heights, reaching over $1.5 trillion, as major corporations started flocking to Bitcoin. MicroStrategy, a business intelligence firm, is also making headlines with its total investment of over 90,000 BTC worth nearly $4.5 bn. Interestingly, 84% of their market cap is bitcoin that implies $0.84 of each $1 goes to Bitcoin. Moreover, there are reports that a $150 bn investment division at Morgan Stanley is considering investing in bitcoin.
PayPal also introduced crypto as a funding source for purchases in 2021, for its 300 mn customers and 26 mn merchants and has set up a dedicated bitcoin and crypto business unit.
“We all know the current financial system is antiquated, and we can envision a future where transactions are completed in seconds, not days; a future where transactions should be less expensive to complete; and a future that enables all people to be part of the digital economy, not just the affluent. We are significantly investing in our new crypto, blockchain, and digital currencies business unit in order to help shape this more inclusive future.” — PayPal CEO Daniel Schulman
To address and accommodate the growing interest of financial institutions and institutional investors, Coinbase also recently added Coinbase Prime, an integrated prime brokerage solution to offer trading capabilities to institutional investors. MassMutual, an insurance firm based in Massachusetts, and Square, a digital payment company have also purchased $100 mn and $170 mn worth of Bitcoin, respectively. Meanwhile, Goldman Sachs will reportedly soon offer its private wealth management clients avenues to invest in bitcoin and other digital currencies.
While a plethora of companies are breaking down the walls of limiting themselves to conventional investment and financial assets, many are eyeing opportunity and thinking to expose them to this digital space soon. Insurance firm, MetLife, with $650 bn assets under management and Billionaire institutional investor, Ray Dalio, have announced to buy bitcoin soon. Most recently, a unit of Morgan Stanley also expressed its intentions to explore whether to invest in cryptocurrencies, although it has a 10.9% stake in MicroStrategy, which gives the bank indirect exposure to 7,681 bitcoin.
However, a wild volatility in crypto markets divides the institutional investor’s opinion on its acceptance as a mainstream investment
According to a JP Morgan survey of 3,400 institutional investors in March 2021, it was found that a majority do not plan to invest in or trade cryptocurrencies, while 58% of them said cryptocurrencies are “here to stay.” While bitcoin’s dramatic surge has received considerable attention from both institutional and retail investors, the institutional community remains somewhat disconnected on the future of crypto. Almost all investors (98%) said they believe fraud in the crypto world is “somewhat” or “very much prevalent.”
The CEO of Blackrock, the world’s largest asset manager, says that he is fascinated by cryptocurrency, believing that it could become a “great asset class.” However, he said that Blackrock has not received many inquiries from its institutional clients about having bitcoin in their portfolios.
“So, I do believe there is component of the financial markets about crypto that is real, that is growing. But, if you’re asking specifically about long-term investing, from sovereign wealth funds, from pension funds, from retirement services, from big family offices, the conversation about crypto is a very minor conversation compared to other conversations.” — Blackrock CEO Larry Fink
Federal Reserve Chair Jerome Powell has said the central bank prefers to call crypto coins “crypto assets,” because their volatility undermines their ability to store value. In February, US Treasury Secretary Janet Yellen said bitcoin is “extremely inefficient” and “highly speculative.” She stressed the importance to develop an “effective” regulatory framework for cryptocurrencies.
“I think cryptocurrencies, we don’t really have an adequate framework to deal with the different issues that they pose from a regulatory perspective.”
Henceforth, while some banks and financial services companies have started considering it as a viable financial asset, others still prefer to stay away.
What actually caused the recent decline in crypto markets?
After skyrocketing and paving the way towards mainstream acceptance, crypto markets witnessed a huge crash in late April. The initial trigger came from the unconfirmed rumors on twitter about impending charges from the U.S. government over crypto money laundering. There were speculations that the U.S. Treasury might crack down on digital-money laundering. Separately, there was a blackout in China’s Xinjiang region that caused 50% decline in bitcoin’s hash rate, which measures the total processing power being used to mine the cryptocurrency and process its transactions. As a result, the total market capitalization of crypto markets tanked by almost by about $310 bn.
It was also speculated that the U.S. may charge as high as 80% tax on cryptocurrencies, which plummeted the bitcoin market cap to below $1 trillion. While the White House is preparing to unveil a comprehensive tax plan that might contain an increase in capital gains taxes on earning over $1 mn, there is no evidence that cryptocurrency will be specifically targeted.
Later in May 2021, Tesla suspended accepting bitcoin as payment for its vehicles, due to its environmental concerns and mentioned they would resume using the cryptocurrency for transactions “as soon as mining transitions to more sustainable energy.”
“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal” — Elon Musk, CEO, Tesla
The plunge was instigated further by the announcement from the Chinese financial regulators to ban domestic banks and other financial institutions from supporting bitcoin. This included processing payments, allowing customers to hold bitcoin in their accounts and converting bitcoin into Yuan or any other currency. It is not just China suspending the cryptocurrencies, rather many banks in the Middle East and Europe are also barred from dealing in bitcoin. Meanwhile, in an effort to address the impending regulatory crack down on crypto, the U.S. Treasury Department said it will require any transfer worth $10,000 or more to be reported to the IRS. This made bitcoin plummeting to $30,066, the lowest since late January.
The speculation of Federal Reserve on increasing the interest rates to counter inflation is also keeping the cryptocurrency under pressure, as it dilutes the appeal of the store-of-value assets. However, the recent announcement by Joe Biden on a massive new spending plan of $6 trillion next year, acted as a bullish backstop for bitcoin and it jumped 7% to $40,000. This works in favor of bitcoin due to its growing adoption as a hedge against the potential currency debasement.
While the heightened crypto volatility, lack of established regulatory framework, concerns around money laundering, and the environmental impact of bitcoin mining has spurred the investors’ concerns and somewhat hindering the mainstream adoption of cryptocurrency, there are still signs that this asset class will continue to advance and boom and reach full maturity at some point in the future.