(Lieve Ransijn/ Unsplash)
When crypto prices were hitting new highs in 2021, we frequently received texts from friends such as, “Wow, look at <insert favorite token here>!” When we asked if they owned said token, responses were often, “Only a little, and now it’s too late” or “I missed it – again.”
Why is it so hard to catch the “bull” before it goes stampeding past?
Famed investor John Templeton said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die in euphoria.” In other words, bull markets start from the lows of the bear, when risks are prominent and sentiment is poor.
2023 is a great example.
Crypto markets limped into this year having survived one of the worst market environments ever in 2022. Bitcoin fell 64%, while many other tokens fell 80 to 90%. Crypto firms FTX, Celsius and others went bankrupt, and regulators made it clear they were going to hold the industry accountable. Meanwhile, the Fed was raising rates at the fastest pace in its history while simultaneously shrinking its balance sheet. As we started 2023, regulatory and macro risks loomed large; the Crypto Fear and Greed Index, a gauge of crypto market sentiment, indicated “Extreme Fear.”
Against this gloomy backdrop, January 2023 was one of crypto’s best months ever. Bitcoin was up 40% and Ethereum up 33%; 7 of the top 100 tokens were up over 100%.
Were risks overblown? We don’t think so. The Fed has indeed continued to raise rates four times in 2023 and shrunk its balance sheet by over $500 billion. In June, the SEC sued both Binance and Coinbase, the two largest crypto exchanges, alleging they failed to properly register. Many other enforcement actions followed.
In our view, the risks facing crypto at the end of 2022 were very real but more than adequately reflected in prices. Extreme pessimism set the stage for the beginning of a new bull market.
Today, risks have changed significantly. The Fed’s interest rate increases are much closer to an end than a beginning. While rate cuts may still be 9-12 months away, the market often anticipates the Federal Reserve’s actions months before they happen. The SEC continues its prosecution of crypto, but the U.S. courts have handed the industry some major wins in the Ripple and Grayscale cases. At the margin, macro and regulatory risks are still significant but declining.
We think we’re entering the “skepticism” phase of this bull market. Despite 2023’s fast start, the Crypto Fear and Greed Index was showing “Neutral” as of Wednesday. Spot trading on centralized crypto exchanges fell to $475 billion in August, the lowest in 3 years. While Bitcoin is up +66% YTD, at $27,525 it is trading -60% below its all time high of $69,045.
Major companies continue to announce crypto initiatives. Google is actively investing in blockchain and Web3 capabilities. Paypal recently announced it would be the first major U.S. financial institution to launch its own stablecoin.
And Blackrock, the world’s largest asset manager and one of the most admired global brands, has filed for a spot Bitcoin ETF:
We think a Blackrock-branded Bitcoin ETF will do more to accelerate mainstream adoption of digital assets than anything that’s happened in the history of crypto. There are still regulatory hurdles to clear, but we think it is a matter of when, not if.
Still skeptical? Templeton might call that bullish.