This week marks a significant moment for advocates of bitcoin and cryptocurrencies as investable assets. Amidst global market volatility and fragility, digital assets have shown remarkable stability characterized by moderate fluctuations.
Last week, bitcoin saw an increase of approximately 5%, while the CoinDesk 20 Index rose by approximately 6%. In a landscape where traditional assets appear to falter, the resilience of cryptocurrencies presents a compelling counter-narrative to skeptics who have long criticized their legitimacy during periods of market stress.
A week ago, I likened the market to a bus perched precariously on a cliff’s edge. While this may have been thrilling for adept traders, it rendered the situation untenable for traditional asset portfolio managers. Although long equity puts might have seemed advantageous as futures tumbled on Sunday night, monetizing those puts in a quick-moving market is exceptionally challenging and puts hedgers in a precarious position of having to predict a market bottom. Failure to monetize the puts could result in the decay of value, solidifying a loss. This is further complicated if the chosen hedge involves retreating to U.S. Treasuries, which offers little solace in such turbulent times.
Risk management practices in traditional markets are facing unprecedented challenges in the current environment. Even seasoned traders with extensive experience are being caught off guard by the market’s violent shifts. For those overseeing pension funds, endowments, or family offices, the pressure to preserve capital while still achieving return targets has never been greater. Strategies that proved successful over the last decade increasingly seem archaic.
Bitcoin’s Stability Amid Liquidation Events
During the ensuing chaos, bitcoin has maintained a relatively narrow price range. Notably, the weakest periods on April 7 and 9 coincided with perpetual liquidations—forced sales of leveraged positions that are far more common in the crypto arena than in traditional markets. Critics have seized on these temporary price dips as evidence of bitcoin’s fragility, but it is vital to push back against this perspective. These liquidation drops represent artificial market flows that can recover over time. While they may create striking lower candle wicks, they do not necessarily reflect the overall market sentiment accurately and should be considered minimally when making assessments.
Store of Value vs. Safe Haven
As is customary, critics have conflated bitcoin’s status as a “store of value” with that of a “flight-to-quality” and “safe haven” asset. It is crucial to differentiate between these categories. As a relatively young asset, with limited access to conventional liquidity sources, bitcoin should not be expected to behave like a mature safe haven or flight-to-quality asset, especially during high volatility periods. To draw a parallel, there are tasks I wouldn’t assign to my teenage children, given their inexperience.
The ongoing outperformance of gold relative to bitcoin this year further underscores this distinction. Gold’s established presence in traditional finance and its historical perception as a scarcity-driven asset make it inherently different. However, one must ask: does gold possess the adoption momentum? Is it the asset of the future? While gold may shine during times of geopolitical and economic turmoil, bitcoin introduces a revolutionary evolution in the concept of money, with adoption rates indicating that we are still in the early stages of its lifecycle.
Michigan Survey Insights: Consumer Sentiment and Bitcoin Demand
The week’s developments in the crypto sphere were further underscored by the University of Michigan Consumer Survey conducted on April 11, which provided compelling data supporting bitcoin’s price trajectory: the highest expectations for one-year inflation since 1981 and heightened unemployment forecasts.
Source: University of Michigan
Source: University of Michigan
We believe it is essential to correlate bitcoin’s demand with expected real interest rates—the differential between expected nominal rates and inflation expectations. When real rates are anticipated to rise, bitcoin is likely to face headwinds. Conversely, when lower real rates are expected due to rising inflation and potential rate cuts, particularly in light of increasing unemployment forecasts, bitcoin typically stands to benefit. The recent Michigan survey data provides a seemingly clear direction for bitcoin accumulation: elevated expected inflation coupled with unemployment expectations that may lead to easing by the Federal Reserve. This framework aids in clarifying bitcoin’s exceptional performance during prior easing cycles and suggests a potentially favorable environment ahead.
The Future Beyond Bitcoin
With Paul Atkins now appointed to lead the SEC and further supportive regulatory movements on the horizon, the broader crypto ecosystem appears to be on an upward trajectory. Might we expect the remainder of the CoinDesk 20 Index, which encompasses approximately 80% of the market, to follow a potential bitcoin-led rally?
Two critical factors support this notion:
Firstly, asset correlations within this sector rarely break down during extensive market rallies.
Secondly, we could see a resurgence in the pro-blockchain trends witnessed last November, reigniting interest across various Layer 1 blockchains, including Ethereum, Solana, Sui, Cardano, and Avalanche, as well as infrastructure providers like Chainlink and Filecoin, DeFi protocols like Uniswap and Aave, financial service assets like Ripple, among others.
The potential for a broader rally indicates that diversification within the crypto space could once again yield fruitful results, particularly if regulatory support continues to bolster confidence. It is crucial to note that the tide that elevates bitcoin typically does not leave other quality projects behind.
