main conclusions
Cathie Wood says institutions can move away from cryptocurrencies She believes they will allocate more Bitcoin and Ether once they take the time to study the crypto space I believe she may be too optimistic but the crypto industry has taken a hit and it may take longer to catch up Cryptography is going through a rough patch. The most worrying development of recent weeks – there have been quite a few and I think you’ll agree – is perhaps what all this means for the industry’s reputation going forward. Which institutions will put Bitcoin on their balance sheet now? Which pension funds will invest in digital assets? The FTX implosion (which I’ve written about in detail here) is so momentous and shocking that it seems elusive to expect anyone connected to traditional finance to move into the space. Is the damage irreparable?
Cathie Wood suggests institutional backlash
I found Ark Invest founder Cathie Wood’s interview with Bloomberg last week to be revealing. Long known for her ultra-optimistic views on all things Bitcoin, she even reiterated in the interview her confidence in her Bitcoin price prediction, which she believes will be worth $1 million per coin by 2030. This did not come as a surprise. , nor totally unpredictable. Wood is convinced that Bitcoin will change the macro landscape in the longer term. It has positioned itself highly aggressively in the market, betting on risky tech stocks, Bitcoin and other assets that have struggled amid the transition to a new interest rate paradigm – as shown by the performance of its flagship ETF below: more was notable in her interview, however. “I think, though, the only thing that will be delayed maybe is institutions stepping back and just saying, ‘OK, do we really understand this?’” she said. This indicates the great danger here. Throughout the pandemic, one of the most bullish things for Bitcoin has been the trend of institutions entering the space. There was Tesla. There was talk about ETF. There was Grayscale. There were public mining companies. There was Coinbase floating around on the stock exchange. There was even El Salvador declaring Bitcoin legal tender. But now that the low interest environment has come to an end and liquidity is being sucked out of the economy, Bitcoin and cryptocurrencies are facing something they have never had to face before – a pullback in the wider economy. Let’s not forget that Bitcoin was launched in 2009, in the biggest bull market in history. It has yet to be tested amid a bearish macro climate, and so this is all unprecedented. And against this test, crypto is struggling. BlockFi, Celsius, Voyager, Three Arrows Capital and all the other failed companies that FTX has now joined have also painted crypto so badly that it’s not surprising to hear analysts warn of setbacks in institutional adoption. Wouldn’t it be more of a surprise if there wasn’t?
Optimism
I should note that Wood added that he thought Bitcoin is going away and “smelling like a rose” from all of this. While I certainly wouldn’t go that far – the whole industry is taking a hit if you ask me – I see where she’s coming from. But while Bitcoin has no counterparty risk and is therefore theoretically immune to the types of implosions we’ve seen in centralized companies like FTX, this is the real world. And in the real world, for ordinary people to have access – not to mention institutions – centralized companies are needed. And until the greed, reckless leverage, naive risk management, and outright fraud (not naming names) in the industry cease to exist, Bitcoin will not gain any significant traction in the mainstream financial space. Institutions will be much more cautious about investing in the space now, after so many high-profile explosions. Regulation is coming in strong. Returns will not be higher. That’s why I take issue with the optimistic tone Wood struck later in the interview: “And once they (institutions) really do their homework and see what’s happened here,” Wood said, “I think they’ll be more comfortable changing for Bitcoin and maybe Ether because they will understand more.” For me, understanding Bitcoin more also comes with understanding that it continues to trade as a very high risk asset in what is now no longer a zero fee environment. While the long-term view might be that Bitcoin is a respectable inflation hedge, it is not where it is right now – something asset managers will take notice of. Cryptocurrency also left a bitter taste in the mouth of those who touched it this year. FTX is just the latest embarrassment for the industry as the world watches with a mixture of smugness, pity and disgust. In this scenario, the reputation of the entire space was shaken. And as interest rates rise, a cost-of-living crisis looms, and data continues to point to a struggling economy, it will take the crypto party a little longer to resume as Cathie envisions.
