Market Musings

  • The 30-day trendline for bitcoin isn’t pretty. And Thursday was particularly ugly, with bitcoin dropping to $35,871. The broader stock market was routed on Thursday as well. And as of this writing, spot gold and silver prices are down. Investors are skittish. 
  • French regulators have agreed to allow Binance to operate in France. That’s huge.
  • The SEC is almost doubling the size of its crypto enforcement unit. More fines and enforcement actions are sure to follow.

What Vin Is Thinking About

Fidelity is changing the nature of the bitcoin market. 

Last week, Fidelity announced it would allow people to invest in bitcoin through their 401(k) accounts.

“(This) represents the firm’s continued commitment to evolving and broadening its digital assets offerings amidst steadily growing demand for digital assets across investor segments,” Fidelity said in its announcement. 

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Fidelity’s commitment to crypto can’t be questioned. It was one of the first institutional investors to embrace the asset class when it launched Fidelity Digital Assets in 2018

By mid-2020, it had about $13 billion in bitcoin in custody. That amount has likely grown significantly since. And in just nine months, Fidelity’s Wise Origin Bitcoin Fund raised $102 million.

Fidelity and other institutional investors are changing bitcoin’s market dynamics. The amount of long-term bitcoin holders has grown significantly thanks to these investors. And that has led to a more “stable” bitcoin market, with bitcoin trading between $38,000 and $42,000 for most of the year.

People investing in bitcoin through their retirement accounts will only increase the amount of long-term bitcoin holders. That will likely decrease volatility and give bitcoin a higher price floor.

Bitcoin is still a volatile asset. And it is far more volatile than the equities market. But bitcoin is also on pace to have its least volatile year since 2017 (and remember, that year included a massive bull run!).

The S&P 500 is down about 10% this year. Bitcoin is down about 14% this year. The two are tracking fairly closely. That raises an interesting question. As bitcoin matures and becomes less volatile, what sort of asset will it become? As more and more investors gain exposure to bitcoin, the possibility exists that investors will treat bitcoin more like a risk asset (stocks, commodities, real estate) than an alternative store of value (gold or silver).

Divining whether that is happening can be tricky, though. The Fed raised interest rates 0.5% on Wednesday, and bitcoin prices went up for a bit. Did they go up because the broader equity market rallied? Or did they go up as a hedge against inflation? 

The fact that both the equities market and bitcoin slumped on Thursday suggests a broader correlation was the likely driver of prices. But it’s hard to untangle the two.

The bitcoin market is definitely changing. And as more people adopt bitcoin investing, whether through Fidelity or other platforms, that change is going to accelerate. That means investors have to be flexible in terms of what’s driving the market.

And Finally…

MicroStrategy CEO Michael Saylor really needs bitcoin to stay above $21,000. Under Saylor’s leadership, MicroStrategy has been aggressively buying up bitcoin and adding it to its balance sheet. MicroStrategy even took out a $205 million loan, collateralized by bitcoin, to buy more bitcoin. Right now, the firm owns about $5 billion worth of bitcoin.

If the price of bitcoin drops below $21,000, MicroStrategy will have to use more (uncollateralized bitcoin) to secure the existing loan. That is a scenario Saylor — and most bitcoin investors — would rather not see.

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