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Crypto: What Doesn’t Kill You Makes You Stronger?

It’s been roughly a year and four months since Bitcoin topped over $65,500. The recent brutal bear market in Bitcoin and cryptocurrency was not the first. In fact, Bitcoin fell 80% or more on three different occasions – the 2017-2018 bear market, the Mt. Gox bear market of 2013-2016, and the initial brutal bear market of 2010-2013.

Despite Bitcoin’s resilience over the past decade, a lot has changed. Because of the maturing of the industry over the years, the recent bear market has been the worst in terms of both dollars lost and market cap. The Grayscale Bitcoin Trust (GBTC - Free Report), a proxy for Bitcoin, clearly illustrates the destruction.

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The precipitous drop in crypto assets led to the demise or bankruptcy of crypto hedge fund Three Arrows Capital (3AC), the Terra Luna stable coin, crypto lender BlockFi, crypto lender Celsius network, and most prominently, Sam Bankman Fried’s FTX and its sister company Alameda Research.

“It’s Only When the Tide Goes Out That You Learn Who’s Been Swimming Naked”

The destruction in crypto is not all that dissimilar from collapses in equity markets over the years. A brutal bear market occurs, investment money dries up, and weaker companies and frauds are exposed.

However, the companies (and, in this case, protocols) that survive ultimately end up stronger during the next bull market. Though it is too early to call a bottom in crypto, some positive signs are developing in the industry, including the following.

1. Institutional Appetite for Crypto-Related Assets

Silvergate Capital (SI - Free Report) is a crypto-centric bank that came under scrutiny for doing business with Sam Bankman Fried’s FTX. Since the revelations went public, shares have been down more than 80% over the past year, profits have plummeted, and the company has had to weather a bank run.

Despite the negative press, declining stock price, and high short interest (65% of shares are short), some of Wall Street’s sharpest minds are bargain-hunting for shares of Silvergate. According to 13F filings, Citadel owns more than 5% of the company. Ken Griffen’s Citadel made the most money out of any fund last year. Blackrock (BLK - Free Report), the world’s largest asset manager, holds more than 7% of shares.

Bill Miller, a value investing legend and long-term Bitcoin bull, also owns shares. The bold bets show that institutional money views the recent crypto crisis as an opportunity.

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2. Bitcoin Decoupling

Over the past few years, Bitcoin, the world’s most-watched crypto asset, has traded more like a leveraged equity ETF than a standalone asset. However, recent data suggests that could finally be changing. For the first time since the FTX debacle, Bitcoin has a negative correlation compared to the S&P 500 Index.

3. Price Action vs. News

Crypto-related assets such as Riot Blockchain (RIOT - Free Report), Coinbase Global (COIN - Free Report), and Microstrategy (MSTR - Free Report), have regained their respective 200-day moving averages. In other words, instead of succumbing to the bad news, these stocks are absorbing the news and finding buyers. Remember, bull markets tend to climb a wall of worry.

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Conclusion

Institutional sponsorship, Bitcoin’s decoupling, and strong price action all suggest that the crypto bear market may be on its last legs. While it is too early to call a bottom, investors should keep crypto-related stocks on their watchlists. If stocks like Coinbase can hold above their 200-day over the next few weeks, 2023 may mark a turnaround year for the industry.

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