Nickel Digital : cryptocurrency price corrections: Speculative retail money has fuelled much of this week’s fall in cryptocurrency valuations says leading fund manager
Speculative retail money has fuelled much of this week’s fall in cryptocurrency valuations
- Large falls in cryptocurrency valuations help to clear out speculative positions and consolidate before the next phase of expansion
- Long-term outlook for cryptocurrencies remains positive
Nickel Digital Asset Management, the regulated and award-winning investment manager connecting traditional finance with the digital assets market, says this week’s correction in the price of Bitcoin and other leading cryptocurrencies was greatly exaggerated by speculative retail money that quickly evaporated as prices dropped, further exacerbating the fall.
Anatoly Crachilov, co-Founder and CEO of Nickel Digital, commented:
“In April, Bitcoin’s valuation hit an all-time high, delivering 122% gain from the beginning of the year, while Ethereum has demonstrated an even more impressive run of 479%. This rally attracted billions of dollars of both institutional and retail capital. While the former often comes in the form of portfolio allocations, the latter is often driven by speculative considerations, in most cases with a use of significant leverage. These overleveraged positions bring vulnerability to the market, making it excessively sensitive to negative news flow. A combination of statements coming from Vitalik Buterin, Elon Musk and Chinese authorities in a space of a week was sufficient to trigger a market correction. This was exacerbated by a cascade of auto liquidations of overleveraged positions on crypto exchanges, which amounted to over $9 billion in 24 hours, one of the largest volume of liquidations ever.
“The large falls in valuations seen this week are, in one way, ’healthy’ as they enable the market to clear excess speculative positions and consolidate before its next phase of expansion. We have seen this pattern time and again across multiple cycles and expect this to remain in place until the market matures and achieves a larger involvement of institutional capital.”
“We will continue to see significant swings in valuations of crypto assets, hence this space is best suited for investors with a long-term view, and who are able to tolerate interim volatility. This volatility can be mitigated either through appropriate sizing (Nickel would argue directional exposure should not exceed 1-3% of investors’ portfolios) or through dedicated market-neutral implementations.
“Indeed, while such price corrections are damaging for some investors, for an investment manager running a market-neutral arbitrage strategy, armed with proper risk management systems and resilient trading infrastructure, this level of volatility offer incredible opportunity.”
Nickel says there are several factors that make Bitcoin attractive to institutional and other professional investors, which bode well for its long-term prospects. These include:
- Inelastic immutable monetary policy. The supply of Bitcoin is capped at 21 million and its issuance schedule is hardcoded and completely uncorrelated with changing demand, which makes it a powerful hedge against currency debasement and inflation as governments and central banks are engaging in multi-trillion-dollar stimulus packages
- Diversification qualities. Analysis by Nickel reveals that Bitcoin price movements have exhibited a low correlation to equity market moves over the last 10 years. During major S&P500 drawdown periods, Bitcoin demonstrated an independent behaviour pattern. This makes Bitcoin an important diversifier for portfolio allocation purposes. For example, in April 2011, the S&P 500 fell by 19%, while the value of Bitcoin increased by 76%. In April and July 2019, the S&P 500 fell by 7% and 6% respectively, but the price of Bitcoin rose by 55% and 14%.
- Powerful recoveries. Whilst there are a number of instances when market liquidity implosions similar to March 2020 led to the price of Bitcoin correcting in unison with the S&P500, it has staged an impressive powerful recovery, far outstripping SPX slow recovery which took over 6 months.
- Engagement of large payment platforms. In late 2020 PayPal made Bitcoin available for instant purchase through PayPal mobile application to its 346m users and in early 2021 will make Bitcoin a funding source for digital commerce at its 26m merchants, whilst Visa is offering a credit card linked to bitcoin.
- The infrastructure around Bitcoin and other digital assets is improving. For example, established financial institutions such as Fidelity and BNY Mellon now offer crypto custody services, while many banks, including Goldman, Morgan Stanley and JPMorgan are providing access to this market to their clients, offering strong endorsement for the concept.