The Death of Crypto Has Been Greatly Exaggerated, Again

Illustration by II

Illustration by II

Crypto’s descent into hell, rather than sending institutional investors straight for the exits, has triggered a hunt for the next big bet.(Part of the crypto column series.)

There is a curious page tucked away in the folds of the internet that proclaims Bitcoin has died more than 460 times.

By that website’s count, the cryptocurrency has been vanquished 24 times so far this year, after dying 47 times in 2021 and 14 times in 2020. Its death rate peaked in 2017 — the year Bitcoin shot to a then-record high near the symbolic $20,000 handle in December, only to fall below $11,000 five days later, shedding 45 percent of its value. That year, the cryptocurrency apparently met its demise no fewer than 124 times. Perhaps only Prometheus has been felled, only to regenerate, quite so many times.

I have watched this so-called “Bitcoin obituaries” page for years, mostly for its satirical value. The website is clear on what constitutes a Bitcoin “death,” stating that the cryptocurrency may only be officially deemed dead when “a person with a notable following or a site with substantial traffic” has pronounced it thus. What is clear from this page — which has been industriously notching crypto kills since 2010 — is that no matter how many bitter feuds, billions lost, regulatory crackdowns, or speculative manias take hold in the burgeoning cryptosphere, its most popular assets are far from ready, as one critic put it, to just die already.

Crypto, of course, is not limited to Bitcoin — far from it — but the mood surrounding the latter can be a good gauge of the former. Since 2010, the launch of new crypto hedge funds has been highly correlated with the rise in the price of Bitcoin, which remains the most voraciously traded of all the cryptocurrencies. That rule carries through to 2022, which saw the lowest number of new crypto hedge funds to enter the market in five years, according to this year’s annual survey of the sector by PwC.

That survey also showed potentially more than 300 crypto hedge funds still humming along globally, with half launching in the past three years. Those that wind up making it through 2022’s crypto bloodbath will have bragging rights for years to come. They will also have another arrow in their quiver: A lot more money.

According to PwC, the average assets under management for crypto hedge funds as of 2021 was $58.6 million, up nearly 60 percent from the prior year, based on the same sample set of funds, which firmly placed them above the $20 million threshold considered to be a critical mass for traditional hedge funds. In other words, crypto hedge funds were well capitalized going into the year, and many are expected to survive its turbulence.

Crypto’s abject refusal to die has infuriated many, inspiring no shortage of blistering screeds. “All manias end in the same way, with a sharp correction that collapses prices like a house of cards . . . . In a nutshell, it’s another case of greed negating fear until it is too late for anything but panic,” warned a report out this month on the perils of “cryptomania” from the Brookings Institution, a nonprofit Washington think tank.

The latest washout should not be called a panic, however — it has not been that sudden, nor fleeting. It would more aptly be a called a months-long grind, marred by calamitous price swings that have increasingly shifted crypto assets further away from their $3 trillion high-water mark recorded in early November 2021, almost one year ago. Around the same time last year, Bitcoin also reached its highest-ever market capitalization at $1.28 trillion. It’s now fallen far from that perch, hovering at $370 billion, trading at just over $20,000, range-bound for the past month.

While Brookings found the “oversized monetary and fiscal impulses in core economies” partially culpable for the soaring prices of what it termed “the bubbling pandemic years,” it heaped much of the blame on “uninformed investors” with a soft spot for disruptive innovations, a hunger for easy, illusory profits, and a blind faith in paradigm shifts that “will supposedly sustain the momentum over time, often conveniently seasoned with abundant global liquidity.”

And it’s not just about kicking crypto when it’s down. Many in the financial community have been apoplectic all along, albeit ever more quietly, as they have been compelled to play nice with crypto-centric clients and partners. When Russia invaded Ukraine, which led to a spike in the use of cryptocurrencies by bad actors to sidestep financial sanctions, the private grumbling on Wall Street was palpable. Had the U.S. missed its chance to crack down on crypto before it undercut national security? Not so, according to a recent report, which found that crypto is, unsurprisingly, not liquid enough to fuel large-scale sanctions evasion. But what crypto did do was raise more than $60 million in donations for Ukraine from around the world during the first few weeks of the invasion, allowing its government to buy desperately needed military equipment and medicine.

That is not to say crypto assets should be granted unbridled, feral hegemony. Perhaps one of the most compelling critiques to emerge during this latest crypto winter is a letter sent to members of Congress earlier this year, signed by more than 1,500 technologists, scientists, and academics from a bold-faced list of companies and institutions, including Google, Microsoft, Amazon, Facebook/Meta, the Massachusetts Institute of Technology, the University of Pennsylvania, the University of California, Berkeley, and many others.

They were brutal in their assessment: “The catastrophes and externalities related to blockchain technologies and crypto-asset investments are neither isolated nor are they growing pains of a nascent technology,” the letter says. “They are the inevitable outcomes of a technology that is not built for purpose and will remain forever unsuitable as a foundation for large-scale economic activity.”

The group urged lawmakers to move quickly to improve oversight of fintech and “take a critical, skeptical approach toward industry claims that crypto assets . . . are an innovative technology that is unreservedly good” and to “ensure that individuals in the U.S. and elsewhere are not left vulnerable to predatory finance, fraud, and systemic economic risks.”

A letter like this — combined with crypto’s nosedive, rising interest rates, inflation, and recession fears, plus the extraordinary litany of spectacular flameouts, bankruptcies, and frauds this year — should be enough to put a permanent damper on any institutional interest in cryptocurrencies and digital assets. But it has not. While retail investors have been gutted and duly chastened, institutional investors are — astoundingly — actively looking for their next entry points into the market, convinced it has not seen the last of its bonanzas.

The Brevan Howard Digital Asset Multi-Strategy Fund, the dedicated crypto and digital asset division of the $25 billion U.K. hedge fund, raised more than $1 billion from institutional investors as of this summer, representing one of the biggest crypto hedge fund launches yet and handily defying the crypto doldrums.

What’s more, Institutional Investor has learned from sources familiar with Brevan Howard’s crypto fund that, while no longer actively fundraising, BH Digital, which oversees Brevan Howard’s crypto trades, is still seeing a phalanx of institutional clients clamoring to get into the fund, launched in January. One well-placed Wall Street source involved in matching up clients says there are plenty of investors still looking to allocate, which could easily take BH Digital to the $2 billion mark.

Around 85 percent of Brevan Howard’s crypto fund was raised from funds of funds, family offices, high-net-worth individuals, and pensions and endowments (roughly in that order), with Brevan Howard contributing about 15 percent of its own funds to the crypto-trading unit.

BH Digital, which commenced operations in September 2021, proposes to invest in a “wide range of diverse opportunities presented by the structural disruption and innovation of blockchain technology” while imposing strict controls, institutional governance, risk management, and expertise native to crypto markets. Brevan Howard has hired a team of more than 60 people, with portfolio managers, analysts, quants, and data scientists set up in eight offices around the world. Already, the fund has gotten high marks for nimbly circumnavigating the worst of the crypto losses this year.

The eagerness of institutional investors to keep splashing out for crypto isn’t limited to Brevan Howard’s success, observes Jeff Howard, head of North America institutional sales and business development at OSL, a Hong Kong-based crypto broker and exchange. “Institutional investors are super bullish right now on crypto going into the fall,” he says. “They are happy for the sell-off, especially those who did well, because it took leverage out of the market and presents a good entry point.”

Howard says that at OSL, August and September were “two of the biggest volume months of the year,” up 250 percent against the same period last year, with institutional investors leading, but well off the massive crypto volumes seen February through June, which were as high as $220 billion a month. So far, crypto volumes in October have come in at just above $180 billion, with retail investors leaving the market and institutional investors cautiously re-entering.

A major stumbling block for crypto continues to be timing the market with its cratering prices, Howard says, as institutional investors are taking a tactical approach to edging back in. “The crypto industry has never existed in a rising interest-rate environment — think about that,” he says. “With so much uncertainty, it’s going to be hard for crypto to go higher. People are ultimately looking for a catalyst, whether up or down, for making their next move, but there are a lot of mixed messages.”

In the meantime, lower prices are allowing crypto investors and businesses to take a beat and reassess, with many using the downtime to make plans for a new growth phase. “Proprietary trading firms, market makers, and hedge funds, I speak to all of them,” Howard says. “And they are aggressively growing their crypto businesses right now.”

As one industry source puts it, the hope is that the new year might offer a fresh start, some clarity on the direction of the market, and an opportunity for existing funds that made it through 2022 to say, “We performed, we didn’t blow up, we are structured to get through a crypto meltdown.”

That is, if they make it through 2022. In crypto time, a few months is tantamount to millennia.

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