You would think the news that Coinbase Global Inc. had entered into a partnership with BlackRock Inc. to help institutional investors manage and trade Bitcoin would energize the slumping cryptocurrency market. After all, if the world’s largest asset manager is interested in transacting in Bitcoin, it would mean Bitcoin and crypto in general had just been given its imprimatur. That is what the crypto folks have been looking for all along, which is some recognition that crypto is a legitimate asset class to go along with equities, fixed income, commodities and currencies.
Although Coinbase’s shares rose some 30% last week on the news, Bitcoin fell. If the partnership had happened during the crypto mania of 2019-2021, you can be sure that Bitcoin would have soared and all the crypto evangelists on Twitter would have been out proselytizing in full force, preaching to all non-believers to “have fun staying poor.” Bitcoin’s disappointing reaction is especially concerning when you consider that this was just the latest in a string of what should have been a positive development that turned out not to be a catalyst. Recall that just a few months ago Fidelity Investments said it would begin to offer Bitcoin in retirement plans for customers, and the bear market in crypto kept on going.
This year has been awful for crypto, with a couple trillion of dollars of value wiped out and the liquidation of several large hedge funds and exchanges, not to mention the resultant collateral damage in the non-fungible token, or NFT, space. The Bloomberg Galaxy Crypto Index’s 57% plunge in 2022 has dwarfed the 13% drop in the S&P 500 Index. More people are now questioning the viability and usefulness of the blockchain technology that underpins crypto.
It's not hard to feel a bit of schadenfreude toward crypto investors these days. They were making gross amounts of money all out of proportion to their intelligence or work ethic, and sack dancing all over people in the traditional world of finance. There was a time when almost all the accounts I blocked on Twitter for their obnoxiousness had “#BTC” in their bio. They’re not exactly sympathetic characters. We had a hunch that it wouldn’t last, and it didn’t. One of the central tenets of Bitcoin was that it was supposed to act as a hedge against inflation. That has turned out to be false.
The truth is that crypto should have a place in the portfolios of institutional investors. I’m not saying there should be a huge allocation, but crypto has some characteristics that make it useful for diversification purposes. (To be honest, it was much more useful for diversification purposes before it became highly correlated to tech stocks.) It doesn’t take a big imagination to come up with a scenario where crypto goes from less than 1% of the global market capitalization of all assets to 3% to 5%. That could certainly happen in the next bull cycle for crypto – and there will be another cycle. We just don’t know when.
The best thing for the crypto world would be the last thing it would ever want to see: regulation. I say this as someone who generally has a dim view of regulation. Getting rid of all the scams and the pump-and-dump schemes would make crypto a safer place to invest. Only then can it begin to attract serious institutional money rather than just dabblers. To be sure, the Securities and Exchange Commission has some things in the works, such as pushing to get crypto exchanges regulated much like traditional securities exchanges. “There’s no reason to treat the crypto market differently just because a different technology is used,” SEC Chair Gary Gensler said in a recent video.
I follow sentiment, and conditions are so poor that I would view the adoption of a regulatory framework as the only potential positive catalyst for crypto at this point. It may be the only way to attract money into the market, because if the BlackRock-Coinbase partnership can’t get anyone excited about Crypto, then nothing will.
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