Over the course of 2020, crypto native market participants have become more versed with macro matters, not only in part due to the ongoing institutionalisation of the marketplace, but also because of the far-reaching implications that various events have had on world economies.
First, it was the onslaught of the COVID-19 pandemic and the resulting March liquidity crisis, which saw an aggressive flight to cash and resulted in just about all assets undergoing a dramatic downward correction. Granted, this was followed by the equally dramatic upside, with Bitcoin and S&P 500 trading in lockstep for some time.
Such was the focus on the ever-evolving macro situation that block reward halving turned out to be the biggest non-event of the year and, instead, the market turned its attention to the liquidity mining craze that was kick started by Compound Finance issuing its COMP token.
Even though Bitcoin traded in a relatively narrow range from early May to August, this period also marked significant inflows into crypto funds and ETPs, specifically Grayscale’s Bitcoin Trust (GBTC). Since then, various analysts postulated a rotation play out of gold and into digital assets.
Specifically, JPMorgan noted that $7 billion has flowed out of gold’s exchange-traded funds (ETFs) since October, while (GBTC) has seen inflows of $2 billion during the same period. More to the point, Grayscale’s assets under management recently rose above $10 billion for the first time on record.
It is also worth remembering that the adoption of Bitcoin by institutional investors has only begun, while for gold, its adoption by institutional investors is very advanced. Thus, any rotation plays will result in an outsized impact to the largest crypto asset. Part of this play is linked to inflation hedges, those seeking an alternative to gold, and even some seeking an allocation to risk.
Not all risk events are negative
Back to market narratives, and the next risk event that threatened to put a dent on appetite for risk was the US election. Equity markets saw some volatility, as expected during the times of uncertainty, and Bitcoin went from strength to strength and alongside it, with inflows into funds/ETPs accelerating even further. Notably, following the elections, capital rotation back into riskier assets failed to stem the clearly growing appetite for Bitcoin and other digital assets.
The next key risk event for the market is Brexit and as it stands, there is a ‘strong possibility’ of a no-deal exit, according to recent comments from British Prime Minister Boris Johnson This would mean that Britain and the European Union would fail to strike a trade deal as part of the final outcome.
Risk-off flows stemming from this, together with unease over the FX rate by the European Central Bank is expected to lead to flight to USD (and perhaps Bitcoin), and, thus, re-calibrate some of the flow. However, similarly to the events of earlier this year, Bitcoin and broader digital markets are expected to weather the storm and continue grinding higher – be that a risk play, hedge or bet on asymmetric returns.