Has bitcoin reached ‘peak negativity’?

Bitcoin seems to have got its mojo back and looking back to Thursday 12 April, it could be the pivotal moment when the torrid bear market of 2018 came to a close.

Last Thursday saw a $1,000 jump in the price of bitcoin, after it tumbled to as low as $6,650 on 6 April, according to research site cryptocompare. Now bitcoin is firming above $8,000.

The sharp recovery in the price has puzzled crypto watchers because there was no newsflow that would seem to warrant the turbo-charged lift-off.

US tax demands and liquidation of short positions

One thesis, of which Tom Lee, head of research and strategy at Fundstrat’s, and others are proponents, is that the price was being driven lower in recent weeks because of forced selling by crypto investors raising money to settle tax demands, particularly in the US but presumably in other countries too.

That seems unlikely given that capital gains are only realised if assets are sold and so would not affect the many long-term “hodlers”, with anecdotal evidence pointing to more recent investors who entered the market during the price explosion at the end of last year holding on to avoid crystallising loses.

Frequent traders, however, would be affected, as gains on each trade would be a taxable event as far as the US Inland Revenue Service is concerned, although losses could be offset against capital gains.

As we mentioned in our previous report, sometimes it is impossible to ascribe a cause for price movements. Perhaps the tax issue has contributed to downward pressure, but whether it is the main driver is another matter. The deadline for filing tax returns in the US was Tuesday 17 April, although that has been extended by 24 hours after the IRS computers crashed.

The vigour of the $1,000 jump might also be explained by the closing out of short positions. Nick Kirk, quantitative developer and data scientist at investment firm Cypher Capital Management, explains: “The ratio of short margin trades versus longs has been increasing recently. Buying volume ticked up today [12 April] and a lot of these short trades got liquidated, helping fuel the rally.”

Another explanation, perhaps, is simply that the bitcoin price has fallen low enough to attract buying interest from institutional investors and a number of high net worth individuals (see below).

The dramatic climb on 12 April was eye-watering even by bitcoin’s volatile standards. However, it should be appreciated that bitcoin is a narrowly held asset. One estimate last year suggested that a mere 1,000 people owned 40% of all bitcoins. The action of these “whales” would therefore have an outsized impact on price movements.

The concentration of holdings in the hands of a relatively small cohort of individuals may have increased during the bear market if those early investors followed Warren Buffett’s maxim – “be greedy only when others are fearful”.

It is obvious but often forgotten that it takes two to tango in a trade – for every seller there has to be a buyer, and those 1,000 individuals may have been adding to their positions, making the market even more susceptible to a small number of buyers or institutional entities impacting the price.

That said, selling by two whales yesterday, accounting for $100 million worth of bitcoin, was argued by some to be the reason behind a $200 price drop in the space of 20 minutes. The balance of the bitcoin wallet address at 3D2oetdNuZUqQHPJmcMDDHYoqkyNVsFk9r fell by 6,500 (worth about $50 million). However, that address may in fact be a “cold wallet” owned by the Bitfinex exchange, which may have been moving bitcoin for liquidity purposes.

The bitcoin price has bounced back since yesterday’s minor pullback to trade at $8,100 on the Coindesk bitcoin price index.

New York State eyes tougher exchange regulation

The move lower yesterday was blamed by other market watchers on the announcement by New York Attorney General Eric Schneirderman that he was opening an investigation into the business practices of 13 US-based crypto exchanges, although that news was released several hours after the price fall so cannot be a valid explanation.

Schneirderman has sent a letter to the exchanges detailing the remit of the “fact-finding inquiry”, which will look at issues such as fees, leverage and other policies. In justifying the inquiry, Schneirderman said: “With cryptocurrency on the rise, consumers in New York and across the country have a right to transparency and accountability when they invest their money. Yet too often, consumers don’t have the basic facts they need to assess the fairness, integrity, and security of these trading platforms.”

Coinbase and Bitfinex are among the recipients of the letter.

Better regulation of cryptocurrencies is seen as a necessary step to make the sector more attractive to mainstream investors and institutions and safer for current participants. The move by New York state coincides with a blog post by the head of the IMF Christine Lagarde that was fairly favourable about crypto, highlighting its “potential benefits”, describing herself as “open-minded” about crypto.

“Understanding the risks that crypto-assets may pose to financial stability is vital if we are to distinguish between real threats and needless fears. That is why we need an even-handed regulatory agenda, one that protects against risks without discouraging innovation. A clear-eyed approach can help us harness the gains and avoid the pitfalls of the new crypto-assets landscape,” wrote Lagarde.

Continuing in that vein, Ripple’s head of regulatory relations, Ryan Zagone, has called on the UK to follow Japan’s lead and introduce robust regulations in order to grow the sector. “We’re at that time now where we need more clarity and rules and we need more certainty. It’s a good time to start revisiting that ‘wait and see’ approach taken by regulators,” Zagone urged.

In March, HM Treasury launched a crypto task force with the Financial Conduct Authority and the Bank of England to develop a regulatory environment and establish industry standards “to manage the risks around crypto assets, as well as harnessing the potential benefits of the underlying technology”, as chancellor Philip Hammond put it at the time.

In other Ripple news, Apple has included the start-ups Interledger protocol in its application programming interface for Apple Pay. The Interledger software is a solution to facilitate interaction between different payment ledgers.

Ripple this week also announced a $25 million investment in venture fund Blockchain Capital.

Calling the bottom as crypto hedge funds struggle

Dan Morehead, the founder of crypto hedge fund Pantera Capital called a bottom for bitcoin at $6,500 on the day of the virtual currency’s great leap forward.

In  a blog post Morehead said: “For those who are new to Pantera who might think a fund manager like Pantera would always be saying, today’s a great day to get long. I rarely have such strong conviction on timing. A wall of institutional money will drive the markets much higher.”

Morehead also cited the tax explanation and, perhaps more convincingly, suggested the markets had reached “peak negativity”. He predicts that bitcoin will trade above $20,000 before year’s end.

Bear market notwithstanding, the number of crypto hedge funds has mushroomed. In mid-February data from Reuters showed there were 226 crypto hedge funds. Pantera Capital has assets under management of $800 million.

Unfortunately for their clients, the hedge funds have not been able to deliver positive returns over the recent period. The HFR Cryptocurrency Index and the HFR Blockchain Composite Index are both down 42% in March and 52% year to date.

Perhaps the crypto hedge funds should take a look at what some of the crypto start-ups are doing in the investment space.

One example comes from French blockchain project Peculium, which recently announced the results of backtesting of its artificial intelligence forecasting engine it calls Aieve. Its results for the past quarter are impressive.

“During the three months of bear market Aieve returned 88% while the top eight cryptos lost between 70% and 80%,” reports Abed Ajraou, chief development officer at the project. Peculium is building what it describes as “the first saving system in cryptocurrency”.

Bitcoin to $250,000 as more institutions warm to crypto: Soros, Barclays, Rockefeller

Another statement out last Thursday helped lift the mood, when venture capitalist Tim Draper, also called the bottom for the market: “If the number of transactions […] catch up a bit, then I do think we’ve bottomed here and I do think we’ve got a sustainable bull run ahead of us.”

He went much further than Morehead’s optimistic stance, predicting that rising transaction volumes will see the bitcoin price touch $250,000 in 2022 and $25,000 by the end of this year. The 2022 projection would represent a 3,000% increase, which is not dissimilar to the run up of 4,000% over past two years.

Draper’s musings were supported by Brian Kelly of CNBC’s popular Fast Money show, citing past performance and brightening prospects for institutional money flows into the sector.

Soros Fund Management is now trading crypto, according to Bloomberg, which reported that head of macro investing, Adam Fisher, had received internal approval to proceed.

That move is somewhat surprising given Soros’s comments at the Davos World Economic Forum in January in which he said: “Bitcoin is not a currency because a currency is supposed to be a stable store of value and the currency that can fluctuate 25% in a day can’t be used for instance to pay wages because wages drop by 25% in a day. It’s a speculation. Based on a misunderstanding.”

Not as prominently reported at the time, however, was his view that bitcoin would always be with us because “as long as you have dictatorships on the rise you will have a different ending, because the rulers in those countries will turn to Bitcoin to build a nest egg abroad”.

Other indications that institutional decision makers are shifting, came from news of investment group Venrock’s partnership with crypto investment house Coinfund. Venrock is a venture capital firm controlled by the Rockefeller family.

Venrock, the official venture capital arm of the Rockefeller family, which dates back to 1969, has partnered with crypto investment group Coinfund to support cryptocurrency and Blockchain business innovation, Fortune reported April 6. Venrock has assets under management of $2.6 billion and its new partner Coinfund is an investor in the Kik messaging app which launched an initial coin offering last year for its KIN token.

Another straw in the wind comes is the hiring of Richard Kim, a Goldman Sachs vice president based in London, by Galaxy Digital, the cryptocurrency merchant bank founded by one-time hedge fund manager Mike Novogratz. Kim will be the bank’s chief operating officer.

Further evidence of a firming in positive sentiment among institutions also comes from reports that Barclays may be joining Goldman Sachs in opening a trading desk for crypto, according to an unsourced report by Bloomberg.

Our final piece of evidence to support the new money view is the growth in over-the-counter deals mentioned in our previous market roundup.

Persistent reports of solicitations being made to crypto influencers via social media can be attested to by this author, with one LinkedIn message stating: “I work with some potential investors they are willing to buy BTC & ETH for a big amount, They are also paying a profit on it above mark price. Can u help me with that? If you need an investor for some investment projects I can help maybe I can mean something for you.”

Other news around the sector sees the world’s largest pornography website, Pornhub, adopt cryptocurrency as the payment mechanism for its premium service – the site has picked Verge (XVG), the 23rd-placed coin by market cap according to coinmarketcap.com. Verge uses the Tor software prevalent on the dark web to hide the IP address of transmissions.

Speaking of the dark web, the opiate epidemic in the US is being fuelled by crypto payments at underground websites selling drugs such as fentanyl imported from China, a CNBC investigation has shown. Bitcoin appears to be the currency of choice as it was on the illegal Silk Road website closed down by the FBI in 2013.

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