Is the crypto winter over?

The rebound in prices was not coincidental. What can be seen as a small return in confidence in the cryptocurrency occurred around the time traditional financial systems were reeling from a series of shocks — the anticipated completion of rate hikes by the US Federal Reserve (Fed) and the collapse of Silicon Valley Bank and Signature Bank, as well as the takeover of the 167-year-old Credit Suisse, reignited a crisis of confidence in traditional financial institutions and structures.

Several crypto advocates have started to make ambitious — or some say, audacious — price forecasts at the same time. The former chief technology officer of Nasdaq-listed Coinbase, Balaji Srinivasan, made a high-profile wager against a pseudonymous Twitter user that investors will rush to secure the value of their rapidly depreciating dollars in Bitcoin, rapidly driving the value of the asset to reach a price of US$1 million by June 17.

Standard Chartered’s head of forex and research Geoff Kendrick even said “the crypto winter is over”, predicting that bitcoin will reach US$100,000 by the end of next year. Since then, bitcoin prices have hovered between US$25,000 and US$30,000. It is currently trading at around the US$27,000 levels apiece, which is up about 63% ytd.

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Bitcoin price chart, ytd. Credit: Bloomberg

Are things improving? Players and observers spoken to by The Edge Singapore cast their doubts. “Most people in the industry, especially those who have been in the scene since the early days, would agree that we are not entering spring yet — we are still in winter, but we may have gotten past the worst parts of it,” says Zhong Yang Chan, head of research at crypto insights and data provider CoinGecko.

Describing the US$100,000 price forecast for Bitcoin by the end of the year as “bold”, Zhong highlights that the cryptocurrency market has had a rough past 12 months, rocked by price crashes, the fallout of industry heavyweights and regulatory headwinds. For the digital asset to reach the US$100,000 level, investors must regain their confidence and return to the market to provide liquidity. Additionally, there must be ample new entrants from retail and institutional players alike, which has not yet happened.

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Julian Hosp, CEO and co-founder of decentralised finance (DeFi) platform provider Cake DeFi agrees. He has strong suspicions supported by tracking tools that the Bitcoin rally this year was artificially inflated by an individual who sold about US$16 billion worth of Binance stablecoin into Bitcoin, resulting in the latter’s pumped-up price. Investors could see Bitcoin rising to US$40,000 this year if this continues. Conversely, investors could see prices fall to US$20,000 apiece if the selling stops, says Hosp.

Although Joshua Foo, regional director for Asean for US blockchain analysis firm Chainalysis, declines to comment on the US$100,000 year-end price forecast, he cautions against speculation, which he believes only fuels distrustful sentiments about an industry already laden with scams.

Foo adds that many in the past have openly speculated on the prices of Bitcoin. Reflecting on the accuracy of previous rounds of forecasts, he says that “probably seven out of 10 have not hit the mark with their predictions”.

Taking a more holistic stance, SPI Asset Management managing director Stephen Innes believes Bitcoin would trade in a broader range on either side of US$30,000 before falling again as the eroding wealth effect from a US recession causes investors to sell all profitable assets.

“As cryptocurrency volatility continues, I hold a cautious stance on the long-term viability of Bitcoin. What should be a race for the best technology has morphed into a Twitter echo chamber of de-dollarisation and the demise of fiat currencies, neither of which will happen anytime soon.”

“But like gold, it sometimes remains a go-to asset amid broader financial turmoil, although its value in a full-blown US recession remains a question mark. Honestly, I would rather have dollars or gold, for that matter,” says Innes.

Trading volume concerns

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Bitcoin has outperformed in the year’s first quarter compared to major asset classes. According to CoinGecko’s 1Q Crypto Industry Report, Bitcoin was the best-performing asset in 1Q2023, marking gains of 72.4% q-o-q, followed by the Nasdaq index at 15.7% and gold at 8.4%.

1Q2023 Bitcoin versus major asset classes returns. Credit: CoinGecko, MarketWatch

Although the direction of cryptocurrency prices throughout this year is still uncertain, many headwinds and tailwinds within the industry may give investors some clues. Aside from overall macroeconomic risks in the traditional financial market, challenges in the cryptocurrency market include regulatory concerns, especially in the US, given the market size, says CoinGecko’s Zhong.

For instance, US Securities and Exchange (SEC) chairman Gary Gensler who adopts a tough stance against crypto, has been on top of the regulatory action crusade in recent months. This year thus far, the SEC has taken action against crypto players such as Bittrex, Paxos, Gemini and Genesis, among other individuals within the industry.

This has caused many to rethink their operations and entities in the US. Some, like stablecoin giant Circle, are even considering a move to Europe. In March, Circle announced that France would be its European key hub, citing the crypto-friendly climate created by Emmanuel Macron’s government.

Meanwhile, the market is still suffering from low trading volumes. In CoinGecko’s report, spot trading volume across the top 10 exchanges totalled US$2.8 trillion for the first quarter of the year, representing an 18.1% increase from 4Q2022. Although trading volume has been on an upward trend since the lows of December, monthly volumes have yet to hit an average of US$1 trillion, a figure last seen in the first half of 2022. Zhong says this may indicate that many existing investors are still on the sidelines.

Similarly, homegrown crypto exchange Coinhako has seen a 30.21% increase in the trading volume of retail investors in 1Q2023 compared to the preceding quarter. The platform also recorded nearly 4,000 new account sign-ups during the quarter alone. Despite agreeing that this may indicate a sign of returning confidence in the space, Coinhako CEO Yusho Liu says it is not to the point where it can be described as “bullish”.

For Cake DeFi’s Hosp, one of the major events he will be looking out for is the fate of crypto giant Binance. In March, the US Commodity Futures Trading Commission filed a civil enforcement action charging its founder Changpeng “CZ” Zhao and three entities that operate the Binance platform with numerous regulatory violations.

Halving opportunities

In the longer term, a major price driver would be the Bitcoin halving, which is set to take place in April next year. Halving is a quadrennial phenomenon where the block reward — or the number of Bitcoin miners get by successfully mining a block of the cryptocurrency — falls to half its value. In 2024, the Bitcoin block reward will drop from 6.25 BTC per block to 3.125 BTC per block.

Historically, this event can be seen as one of the driving factors behind Bitcoin’s previous bull runs.

Over the last three halvings in 2012, 2016, and 2020, bitcoin saw short price corrections followed by a prolonged bull run between six to 12 months. After the last halving in 2020, Bitcoin’s value rose 366% and 559% over the next six and 12 months.

With greater awareness and access — on top of its use as a hedge against the banking crisis and robust infrastructure development — there is a good chance that investors may see another bull run following next year’s halving, says Lasanka Perera, CEO of the crypto exchange Independent Reserve (IR) Singapore.

Independent Reserve Singapore CEO Lasanka Perera. Credit: Independent Reserve

“From the demand point of view, there are now more longer-term holders of Bitcoin, which means there is less Bitcoin available for short-term trading. Post-halving, when the block reward is cut to half, the amount of Bitcoin mined daily will also be halved to about 450. We can expect a big price move leading into the halving up to a year after it, although nothing is certain,” adds Perera.

CoinGecko’s Zhong reminds investors that past performance does not indicate future returns. He says certain developments in the Bitcoin space may further emphasise the price movements before and beyond the halving. One example is Bitcoin’s move to the Lightning Network.

The Lightning Network is a “layer 2” (secondary protocol built on top of an existing blockchain system) introduced by developers to address Bitcoin’s slow transaction speed and excessive energy use.

As layer 2 transactions occur off-chain, they allow more transactions to be processed with fewer computational resources, thus significantly reducing transaction costs.

The Bitcoin space has also seen a flurry of development recently. In January, Bitcoin core developer Casey Rodarmor launched “Bitcoin Ordinals” — a protocol allowing for the inscriptions of “satoshis” (Bitcoin’s smallest denomination), allowing them to be tracked and imbued individually.

Zhong says that Bitcoin Ordinals have proven very successful, with many in the industry experimenting in creating non-fungible tokens (NFTs) on the blockchain. This capability had caused a surge in demand for block space, causing an astronomical spike in the fee required to conduct transactions on the network — with average fees reaching over US$30 on May 8 compared to US$3 at the beginning of the month.

“The surge in fees has made Bitcoin miners very happy. Plus, this surge in interest to create NFTs on the Bitcoin blockchain could create enough demand to drive up the price of Bitcoin pre- and post-halving,” says Zhong.

There is no certainty that this will occur. Zhong recounts Ethereum’s price movement before and after its highly anticipated “Merge” in September last year. Before the Merge, Ethereum’s price rallied from the year’s low to a peak of US$1,982 on Aug 14, 2022. After Merge, however, Ethereum’s price went flat before a quick jump and fall amid the start of the FTX saga — this could also happen in Bitcoin’s case, he adds.

Merge involves Ethereum’s move from proof-of-work mining to proof-of-stake, which leads to significantly less energy in its transactions, among other benefits such as better security. Ethereum is currently trading at the US$1,800 level apiece.

Correlation to continue

Throughout its first decade, cryptocurrencies were typically seen as an asset class with little correlation to traditional assets such as equities and bonds. This narrative, however, had been repeatedly tested over the years of different market-moving events within the traditional finance space.

“In the past, you see an inverse relationship [between cryptocurrencies and traditional asset classes]”, says Chainalysis’s Foo. “If tech stocks go down, then you see, typically, Bitcoin and crypto prices go up, and vice versa.”

But in 2021, institutions could not turn away when the cryptocurrency market exploded in value to approximately US$2.6 trillion while boasting an annual growth rate of more than 150%. Big banks and investment firms began using digital assets as alternative investments.

A report by Chainalysis said the correlation began around that time and could no longer be divorced from then on. Large institutions with a portion of their portfolio in these funds have more at stake in preventing an industry collapse.

“They can move the [cryptocurrency] markets because the amount they put in is in the billions,” Foo adds, adding that the same factors that make up the price change are difficult to pinpoint.

In recent years, the correlation between the performance of Asia equity markets and crypto assets has also grown. A post by the International Monetary Fund (IMF) on Aug 21, 2022, said the returns and volatility correlations between Bitcoin and Asian equity markets were low before the pandemic but have increased significantly since 2020.

Using its spillover methodology, IMF found that the rise in crypto-equity correlations in Asia has been accompanied by a sharp rise in crypto-equity volatility spillovers in India, Vietnam and Thailand. They say this indicates a growing interconnectedness between the two asset classes that permits the transmission of shocks that can impact financial markets.

Investors’ concerns in crypto assets correlation do not stop there. Those The Edge Singapore spoke to say it is concerning to see Bitcoin and other cryptocurrencies, such as Ripple, Cardano and Polygon, moving in tandem despite each token having different fundamentals, making it impossible to enjoy diversification benefits.

Based on CoinGecko’s analysis over the years, it can be summed that Bitcoin’s correlation with other cryptocurrencies is at 99%, says Zhong.

This may present opportunities for high-frequency traders who leverage on the pattern by deploying a rotation strategy, but it may not be suitable for investors who choose to deploy a dollar-cost averaging strategy.

Although it is unlikely that a clear decoupling can be seen shortly, new data suggests that certain project and utility-driven crypto assets are moving away from Bitcoin’s direction, says IR’s Perera. These assets, backed by credible teams trying to build unique use cases, may move separately from Bitcoin.

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