FT Cryptofinance: Bitcoin needs a story to sell

Bitcoin prices have been constantly earthbound since June’s crypto credit crisis rather than going to the moon.

The world’s most traded digital token has hovered around $21,000-$24,000 for the past six weeks, an oasis of relative calm after the rollercoaster of the past two years.

For believers, perhaps a break was necessary after a 70 percent drop in value since November. The memory of May and June – when the collapse of the now infamous (un)stablecoin terra and its counterpart luna crashed prices and claimed companies such as Three Arrows Capital, Voyager Digital and Celsius – is still raw.

The past nine months have helped lay out some of the most optimistic claims on behalf of bitcoin. It’s not a hedge against inflation, or digital gold, or a substitute for US tech stocks, which also enjoyed big gains after the pandemic. In the last six months, the Nasdaq has fallen 4 percent, while bitcoin is down a whopping 46 percent, according to Refinitiv.

But as pointed out by Jeff Dorman, chief investment officer at asset management firm Arca, “bitcoin is stuck”.

In the same six-week period, shares have rebounded, as have digital tokens such as ether, Uniswap, AAVE and Matic, as investors look for signs of optimism. Not so with bitcoin.

“Bitcoin . . . has completely lost its narrative — it is not an inflation hedge, it is not uncorrelated and it does not trade defensively. As a result, without any narrative of its own, bitcoin has traded like ‘Nasdaq beta’ and will continue to do so until it recovers a new narrative,” Dorman said.

What is that narrative to focus on? It started life as a censorship-resistant tool to bypass regulation. It still hasn’t been hacked, but it hasn’t found any real utility either.

Its pseudonymous creator Satoshi Nakamoto envisioned it as a “peer-to-peer electronic cash system,” but that dream is as far away as ever. Yes, bitcoin became legal tender for the first time last year when El Salvador adopted the cryptocurrency, but it is not widely used. Significant technical barriers such as scalability remain. Even Sam Bankman-Fried, CEO of the crypto exchange FTX, says that it has no future as a payment system.

“If the price of bitcoin remains stable against a basket of goods, then yes on a purely theoretical basis it could be a medium of exchange,” computer programmer and outspoken crypto critic Stephen Diehl told me, with the caveat that even six months would not be a long enough trial period to be sure.

But the paradox of bitcoin is that if it is stable enough to be used as a medium of exchange, it is a bad investment because its value is not appreciated.

Market trends indicate that bitcoin is still viewed as a speculative asset. Just last week, BlackRock, the world’s largest asset manager, launched a bitcoin private trust citing “significant interest” from clients despite the digital asset falling off a cliff since its peak in November 2021.

Previous collapses have resulted in huge rallies a few years later, a fact that invites speculation that this pause could provide time to prepare for another bull run.

“Major asset managers are now under more pressure to provide crypto to their clients . . . prices are easier to come by and sophisticated investors know you’re buying after a massive crash,” Aaro Capital CEO Peter Habermacher told me. “We don’t see bitcoin as digital cash. Traditional fiat and stablecoins are better means of payment.”

Still, it takes a brave investor to dive in right now. A world with high inflation and rising interest rates is new ground for the crypto industry.

“There remains a weak backdrop for risk assets, with the Fed and the inflation picture likely to continue through the rest of this year,” said Dan Ives, senior equity analyst at Wedbush Securities.

Maybe it doesn’t pay to overanalyze the cryptocurrency price movements and the main priority is to be well positioned at the moment it explodes. Still, bull runs need the rocket fuel of a decent narrative to sustain them.

Highlights of the week

• Don’t miss this FT Tech Tonic podcast looking back at the crypto market’s drastic fall from grace. My colleague Jemima Kelly and I take you through the unraveling of digital assets from the collapse of terra and talk to a “real” crypto investor who still can’t admit how much money he lost. Jemima asked MicroStrategy CEO and bitcoin fanatic Michael Saylor what if he was wrong to buy billions of bitcoin? “We would already be out of business if we hadn’t,” Saylor said.

• A dispute between Galaxy Digital, one of the industry’s largest investment management firms, and custodian BitGo became public. Galaxy, led by (reformed?) Luna-tic Mike Novogratz, was supposed to buy BitGo in a deal worth $1.2 billion. After months of delays, Galaxy called it off, alleging that BitGo failed to provide audited financial statements. BitGo struck back. Its legal advisers said it was an “inappropriate decision” to terminate, adding: “Either Galaxy BitGo owes a termination fee of $100 million as promised, or it has acted in bad faith and faces damages of that amount or more .”

• Make sure you read my colleague Kadhim Shubber’s amazing Celsius scoop on Alex Mashinksy who took control of the crypto lender’s trading strategy in January.

• Even more waves are reaching shore from the fallout from the collapsed crypto hedge fund Three Arrows Capital, which plunged into bankruptcy in July. Genesis is the crypto brokerage that lent nearly $2.5 billion to the now bankrupt Singapore group. CEO Michael Moro is stepping down after six years in the role, and a fifth of its 260 employees are leaving.

• Crypto platform Hodlnaut (no, me either) is the latest to be caught up in the terra-luna crash. After suspending operations earlier this month, it has now laid off four-fifths of its staff (around 40 people) and is seeking bankruptcy protection in Singapore, as it does not want to make a forced liquidation of crypto assets in a depressed market. Users should not get too hopeful. One of the prepared FAQs asked, “Is my money gone?” The company responded: “No, while Hodlnaut is facing a difficult financial situation at the moment, not all of your assets are gone.”

Soundbite of the week: CDPQ closes door on further crypto investments

Hindsight is 20/20. Canadian pension fund giant Caisse de dépôt et placement du Québec (CDPQ) wrote off all of its $150 million investment last October in Celsius, the now-collapsed crypto-lending platform led by Alex “unbank yourself” Mashinksy. CDPQ chief Charles Emond tried to explain:

“For us, it’s clear when we look at all this. . . that we prematurely entered a sector that was changing, with a business that had to cope with extremely rapid growth.”

Data mining

This year is the year of cryptohacks, concludes a study of cryptocrime by the blockchain analysis firm Chainalysis.

It took cybercriminals about seven months to break the $1 billion mark for total hacked crypto last year. This year, they have managed to break that barrier in just three months. By the end of last month, hackers had pocketed nearly $2 billion, Chainalysis found. North Korean state-sponsored groups have been particularly active, stealing around $1 billion from DeFi protocols.

The data also found that the “revenue” from crypto-related fraud is significantly down – about 65 percent lower this year compared to last July.

It is hardly surprising given that ordinary investors have left the market when it collapsed. Still, it seems that if you can’t fool a scammer, you can at least hack them.