Is crypto winter thawing?

Last year turned out to be a gloomy year for cryptocurrencies after a series of scandals and deteriorating markets plunged digital assets into the now widely known phenomenon of a “crypto winter.”

The collapse of the crypto token Terra in May, the bankruptcy of lender Celsius in July and the dramatic fall of Sam Bankman-Fried’s crypto exchange FTX in November sent prices south, with bitcoin falling over 71% in the 12 months since its peak in November 2021. .

Fast forward just three months and the tide seems to be turning.

Bitcoin has been on a tear since the turn of the year, up 35.8% as of March 3, in signs that subdued inflation has whetted investors’ appetite for riskier assets of all forms. Meanwhile, the second largest coin by market cap is ethereum, up 31.7% year to date.

However, recent events surrounding crypto bank Silvergate show just how precarious the asset class remains, with bitcoin and ethereum prices both falling 5% within one hour of trading on news the bank has delayed filing its financial report.

Will Rhind, founder and CEO of GranitShares, said: “Price predictions for bitcoin in the coming year are more optimistic, and while it may not reach its previous record high of more than $68,000 in 2023, there is room for significant growth from today levels.of around $23,000.

“There is a growing consensus that the price will recover strongly this year, and there is similar optimism about ethereum.”

Spring’s green shoots have also been felt throughout the ecosystem. Cryptocurrency exchange Coinbase lost 90% of its value in the crypto winter, but is up 95.2% since its lows in December.

The regulation is also fast. After last year’s carnage, conversations about the shape and level of oversight have shifted in recent weeks, with the Securities and Exchange Commission (SEC) cracking down on several areas of the industry, and some welcoming the tougher scrutiny.

The idea of ​​the “crypto winter” itself suggests that a new season will emerge at some point with the promise of better times ahead, and whether you decide to label it crypto winter or not, the question on many people’s lips is what is in wait for 2023?

The early signs of spring?

When sentiment changes in the market, there are some key indicators that show it will be more than short-lived.

Charlie Morris, chief investment officer and founder of ByteTree, said network demand for crypto at the asset manager has turned bullish again, after a year of decline, pointing to the strong correlation with the stock market so far in 2023.

“You also have a strong performing stock market,” Morris said. “It can go horribly wrong at any time because the correction last year was quite shallow compared to what we deserved, but if the stock market is ok, then crypto is ok.”

With strong stock markets and cryptocurrencies so far this year, it’s tempting to think that if market sentiment changes, cryptocurrencies will follow suit.

However, James Butterfill, head of research at CoinShares, said it’s important to understand the difference between risk on equity sentiment and the end of crypto winter, given a possible divergence between the two asset classes this year.

Explaining the link between digital assets and stocks, Butterfill said both stocks and crypto were highly sensitive to rising interest rates, different fundamentals meaning they could diverge significantly this year with stocks likely to fall in an incoming recession.

“Stocks are interest rate sensitive margins get squeezed, while bitcoin is interest rate sensitive because it’s priced in dollars of fixed supply, so their correlation has been a coincidence,” he said.

“It’s quite likely that we’ll see a more dovish Federal Reserve situation this year because the US economy is deteriorating quite rapidly, and that will be quite bad for stocks and actually quite good for bitcoin.”

Morris added that he doesn’t see crypto and stocks diverging anytime soon, but there will be a point when bitcoin starts to behave more like gold in the future.

Despite this, JP Morgan recently noted crypto as a “risk segment” due to a potential $1 billion share selloff driven by overfunded defined benefit pension plans looking to redistribute capital.

“The large overfunding and market developments could lead to an increase in redistribution,” said Marko Kolanovic at JP Morgan.

“Market crises tend to develop in a non-linear fashion, informally known as ‘gradual then sudden'”. Currently, several potential segments are at risk, such as commercial real estate, venture capital, private equity, crypto and stock holdings which are popular among retail.”

The legacy of FTX

A lot has happened since the FTX debacle sent crypto markets into a tailspin last November, but there are also signs that the devastation left in its wake is fading.

Since then, regulators have turned up the heat on the crypto market. Over the past few weeks, the SEC has implemented a series of enforcement actions against digital asset companies and placed new scrutiny on banks that provide custody services to crypto firms.

“Investors were spooked by the fairly aggressive approach that the SEC has taken,” Butterfill said. “Since the SEC crackdown, bitcoin has performed quite well, and that is encouraging.

“We’ve noticed a big increase in concerns over government over regulation, but a big decrease in concerns over a ban, and that’s a positive thing.”

“When we talk to clients, even after FTX, the majority are pretty constructive and understand that you didn’t stop buying stocks because of Bernie Madoff. It’s the same with crypto assets and FTX, so institutional investors really have a pretty constructive view.”

In the past week, bitcoin-focused exchange-traded products (ETPs) recorded outflows of $7 million, according to CoinShares, as investors were unsettled by macro data that beat expectations to the upside, leading to fears of further rate hikes.

Conversely, retail investors took this as a buy signal with bitcoin rising 10.2% in the five days to February 17, highlighting how different types of investors are approaching the asset class and why it’s not as simple as saying “crypto winter is over” .

“If you look at the prices this year, we’re definitely out of the crypto winter, if you want to call it that,” Butterfill added.

“To date crypto ETP fund flows are $170 million. Even last year we saw $509 million and yet it was an extreme bear market. It’s just encouraging to see the flow in such a bear market with institutional investors buying the weakness.”

This article first appeared in ETF Insider, ETF Stream’s monthly ETF magazine for professional investors in Europe. To access the full issue, click here.