Why Bitcoin Investment Case Is ‘Most Challenged’ In Years: Crypto CIO

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• Travis Kling is chief investment officer at crypto asset management firm Ikigai.
• Traditional shares and crypto are too connected for bitcoin to be an inflation hedge, says Kling.
• Ex-Point72 portfolio manager breaks down the bull case for ethereum.

Bitcoin’s market dominance was at a four-year low on Thursday.

Trading at $19,856, the cryptocurrency had not taken such a small market share since March 2018. Bitcoin accounted for 39.06% of the market with a capitalization of $387.85 billion, according to CoinMarketCap.

However, all major cryptos have fallen, with the industry’s value down around two-thirds from its peak. Both ethereum and bitcoin are down over 70% from their record highs.

However, Travis Kling, CIO of crypto valuation management firm Ikigai, says bitcoin’s investment case is the weakest it has been in years.

“Bitcoin’s investment case is the most challenged I’ve seen in the five years I’ve been watching closely,” the former Point72 portfolio manager told Insider. “It was not a CPI inflation hedge.”

Maximalists have touted bitcoin as an inflation hedge because of its fixed supply of 21 million and its store of value, comparable to alternative investments such as gold or art.

In bitcoin’s 13-year history, interest rates have been low, potentially not testing this narrative until recently. And as economic factors influence markets, crypto’s high correlation to traditional stocks has proven otherwise.

“I didn’t expect it to be uncorrelated, although I didn’t expect the correlation to be so tight for so long,” Kling said.

However, as the Federal Reserve continues to raise interest rates, investors appear risk-averse. The S&P is on pace for three consecutive quarters of losses, which has not happened since the financial crisis of 2008. Policymakers expect gains to continue into next year, according to the Fed’s latest outlook, with rates around 1.5 percentage points from current level.

“It’s all a trade,” he said. “This is Jay’s world at the moment, and crypto is going to live and die by him, along with every other asset on planet Earth,” he added, referring to Fed Chairman Jerome Powell.

It’s a “multi-pronged macro risk” that has also led to hemorrhaging in the crypto markets, Kling told Insider, citing tough macro conditions like an uncertain geopolitical climate, a looming EU energy crisis and hawkish monetary policy.

If not bitcoin, then what?

Kling says bitcoin “profoundly underperformed” last market cycle, and as the Fed enters an “easing cycle” its dominance over the market could continue to wane.

“When this whole space gets ripped off again,” says Kling, “it would be my strong base case that bitcoin is going to underperform, and that in that situation it will make new lows in market dominance.”

Ren Yu Kong, a DeFi portfolio manager at crypto hedge fund BKCoin Capital, predicts that ethereum could topple bitcoin by market cap in the next five years.

“At the beginning of this year, if you asked an investment expert, the de-facto answer was definitely the dollar cost average of BTC,” the 25-year-old previously told Insider. “If you really wanted to take a little more risk, you could allocate a little bit to ETH. I think that’s definitely changed now.”

Ethereum’s market capitalization is currently half that of bitcoins. Bitcoin’s market cap is $372 billion, while ethereum’s is $162 billion.

Some executives are even more bullish on ethereum, believing it could overtake bitcoin in market capitalization within the next year.

In an August note to clients, Sean Farrell, vice president of digital assets at Fundstrat, said the firm was on “flipping” watch as bitcoin continued to underperform and ethereum transitioned from a Proof of Work to Proof of Stake consensus mechanism.

“We believe that from both a narrative and fundamental perspective, ethereum now has a good chance of surpassing bitcoin in market capitalization over the next 12 months,” Farrell said.