Cryptocurrency: Will Crypto Get Its Buzz Back?

Just a couple of years ago, there was an enormous amount of buzz around all things crypto. It seems that everybody and their uncle coined their own digital currency. Crypto funds popped up almost every day; you couldn’t ride a taxi without a driver lecturing you on the advantages of crypto investments.

It’s all gone now, it seems. You can go through all the day’s financial headlines without encountering the word “crypto” even once. Instead, all you see now is Artificial Intelligence (AI): it has stolen all the fame and seems to get all the investors’ money.

As the spotlight is taken by AI, has crypto been left to die in the shadows, or will it get its buzz back soon?

No Enthusiasm to Curb

August so far is shaping up to be the digital currencies’ worst month since FTX’s collapse in November last year. The MarketVector Digital Assets 100 Index, which tracks the performance of the 100 largest digital assets weighing them by market cap, is down by 13% so far this month.

Two main cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH), which together comprise about 65% of the crypto market, are down 60% and 65%, respectively, from their all-time highs in November 2021. The crypto market size, by the way, fell from over $3 trillion at its peak to about $1.2 trillion now.

After a dismal 2022, the digital coins rallied into 2023, clawing back some investor confidence. But then a flurry of news, from regulatory uncertainty to revolving rumors about an imminent collapse of the world’s largest exchange, Binance, tainted the crypto picture again. Generally, confidence in crypto is so weak now, that any negative news can shake the whole market. For instance, a report that Elon Musk’s SpaceX has sold its BTC holdings has led investors to pull $1 billion from cryptos within 24 hours. On the other hand, positive news doesn’t seem to have an effect of comparable magnitude: even when Coinbase (COIN), the second-largest crypto exchange, said it had secured regulators’ approval to sell coin futures to retail investors in the U.S., digital currencies continued their downslide.

One of the reasons for this is the Federal Reserve’s fight against inflation, which has already caused many casualties, and more are likely to come. As policymakers signal “higher for longer” interest rates, enthusiasm towards all kinds of risky assets – except the hype du jour, of course – has waned. Investors outside the tight circle of “crypto bugs” (perpetual crypto enthusiasts) are just not that interested. The Fed is draining the already tight liquidity from the financial markets, and all the money that is still looking for a home is routed in the same direction, i.e., anything related to AI.

In addition, there is regulatory scrutiny, threatening to complicate trading in cryptocurrencies. Ever since the collapse of FTX, the U.S. Securities and Exchange Commission’s (SEC) efforts to sort out the crypto market and bring it under control have been accelerating. The two largest exchanges, Binance and Coinbase, are now embroiled in the SEC lawsuits. Meanwhile, even the regulatory status of cryptos in the U.S. is still unclear, let alone having a coherent legal framework. This fact alone lessens the appeal of cryptos for most institutional and individual investors, diminishing the potential investment volumes.

Another Crypto Winter Has Come

Given the fact that a fresh influx of investments isn’t expected anytime soon, while dispassionate media wakes up only to deliver scoops, aka negative news, many predict an imminent “end of crypto.” Others forecast a strong recovery, driven by this or that new crypto ETF possibly to be listed in the U.S., if and when the regulators approve.

It looks like both sides are wrong. Yes, the Federal Reserve’s hawkishness – which continues to surprise the markets, even though the policymakers have tried to drive home the message many times – is a major headwind for risk assets. Until there’s a light at the end of the inflation tunnel, the threat of another hike will continue haunting cryptos, among others. But BTC still trades at a multiple of its price before the melt-up it experienced in 2021, and most major digital assets also hold on to some portion of their gains from the bubble times. If they have shown this resilience through the worst part of the rate-hiking storm, they will probably survive. Surely, there’s still a lot of money to be lost on failed crypto bets, but the market itself isn’t going to implode.

Bitcoin, the longest-standing digital currency, has seen many rallies and crashes in its not-so-long history, dating back to 2009. The crypto market as a whole has experienced high turbulence ever since it was shaped up as a “market” with the appearance of the first crypto exchange in 2011. What that market is experiencing now is probably another “crypto winter” – basically, a crypto bear market. The problem is that, in contrast with the stocks’ bear markets, there’s no official definition of a “crypto winter,” such as a percentage of decline to be defined as such. Anyway, we’ve seen crypto bear markets in 2018 in the first half of 2021, followed by enormous rallies. The only difference is that this time, a near-term catalyst for such a rally is nowhere to be found. But there’s always hope.   

BTC as a Risk Proxy

Cryptocurrency prices are correlated with stock prices, and the strongest correlation is observed between cryptos and tech stocks. This is quite unsurprising, of course, as it is to be expected that one of the riskiest assets out there behaves as a leading indicator of general risk sentiment. Risk sentiment affects stocks with a speed and magnitude that depends on their level of risk; i.e., when investors sour towards the economic prospects, they first pull out of riskier, pricier assets, while the turn of blue chips and value stocks comes much later on the de-risking curve.

Source: Google Finance

The Nasdaq Composite (NDAQ) and the Nasdaq 100 (NDX) are down over 5% so far in August, depressed by the Fed’s hawkishness; however, they are still up 31% and 38%, respectively, for the year. Although the central bank is not expected to cut its key interest rates soon, the end of its hiking path is nearing, which means that the markets soon will get a break from monetary policy changes (the rate level is secondary in its effect on the rate of change in the interest rates). If the economy remains more or less resilient, the risk sentiment will rebound.

The first to soar will be the tech stocks, because the AI narrative is almost as strong as, and at times even stronger than, the Fed’s hand. Then, the risk-on mood will spill to other types of risky assets, including cryptos. That is, Bitcoin will regain its ground after Nvidia (NVDA) resumes its AI rally. Of course, some factors may spoil the crypto party again, such as regulatory uncertainty, or any new scandal or lawsuit. In addition, even in the absence of negative developments, the break-neck rally seen in cryptos in the past shouldn’t be expected, since that momentum is long gone. But for more risk-inclined types of investors, those who consider holding cryptos, now may be a good time for gaining some exposure, while they are on the cheap side.

Just Like Any Normal Asset

The news that the second-largest digital currency, Ethereum, may see regulators’ approval for the U.S.-listed ETFs to trade in its futures as soon as in October, has failed to impress the markets. While crypto bugs speculate that the approval stamp will rekindle sentiment and draw investments into the crypto arena, the fact that it is not making headlines is quite discouraging. When the first Bitcoin futures ETFs were given a green light back in 2021, the markets became obsessed; now, we are not experiencing even the tiniest sliver of exuberance.

Maybe it signals that current market conditions just can’t support any meaningful investor hype over more than one point of interest. Or maybe it means that the crypto world has grown out of its bubbly past, and is maturing – namely, turning into another “normal” financial asset. Surely, it’s a process that will take years, but if cryptos overcome their shady past and improve their reputation, they will see mass adoption and steady growth.