Illusion or reality? Crypto demand either faltering or poised to charge

BlackRock is the world’s largest asset manager, so when its CEO, Larry Fink, remarked recently that he was seeing “very little in terms of investor demand” with regard to crypto and Bitcoin (BTC) based on “my last two weeks of business travel,” it set off some alarm bells.

A lively Twitter discussion followed one commentator’s remarks of how BlackRock was simply protecting its legacy bond business, given that “Goldman Sachs, BNY Mellon, State Street, Morgan Stanley, all entered the space in response to demand.” Furthermore, BlackRock is the second-largest owner of MicroStrategy (MSTR) stock, regarded by many as a pure Bitcoin play.

As has been recounted, Bitcoin reached its all-time high of $64,000 on April 14 but soon thereafter plunged, and it has now been trading at roughly half its April high for weeks, as have many other cryptocurrencies. Some users are understandably nervous.

Moving beyond market cycles

Perhaps it is better to adopt a longer-term view regarding recent events. “Two months is a very short time period in crypto,” Bitwise chief investment officer Matt Hougan explained to Cointelegraph, adding, “I’m not sure what to make of Fink’s comments, except that they don’t align with our day-to-day experience.”

“Institutional investors take 12–36 months to do due diligence,” Jeff Dorman, chief investment officer of digital asset management firm Arca, told Cointelegraph, adding further, “They aren’t timing market cycles. They are trying to get comfortable with the asset class to make a 10-year-plus commitment.”

“It’s important to remember that the market is up more than 200% in the past 12 months, making it the best-performing asset class in the world over the last year,” added Hougan, who claims to see continuous inflows into Bitwise.

Moreover, crypto and blockchain technology is a global phenomenon, and one has to be careful about drawing worldwide conclusions from American or European events. BlackRock, for the record, is based in New York City. “It doesn’t feel like a crypto winter here in Asia,” Justin d’Anethan, head of exchange sales at Singapore-based EQONEX, told Cointelegraph, adding:

“While prices falling have definitely dampened some of the enthusiasm, we’re still seeing a clear interest for crypto and crypto- and blockchain-based ventures. If anything, the stagnation in the lower 30,000’s was/is seen by many as an opportunity to get in.”

Elsewhere, Emin Gün Sirer, Cornell University professor and creator of the Avalanche blockchain protocol, told Cointelegraph China recently that hedge funds aren’t the only institutional players probing the crypto waters these days: “I have been getting contacts from retirement funds, [...] far more slower-moving but with maybe 10 times more dollars under their control, and they are slowly coming into crypto.”

Also, Fidelity Digital, an institutional pioneer in the crypto space, has been aggressively expanding lately — boosting staff by 70% due to “strong crypto demand,” including 100 new workers in Dublin, Boston and Utah, as Fidelity Digital president Tom Jessop told Bloomberg. The firm sees more demand from retirement advisors as well as companies, and it is broadening its product offerings accordingly. “We’ve seen more interest in Ether, so we want to be ahead of that demand,” said Jessop. Megan Griffin, a Fidelity Digital spokesperson, told Cointelegraph:

“We haven’t seen a material change in [crypto] demand during the [post-April 14] drawdown, given institutions tend to hold a long-term view and are experienced in managing through cycles.”

Dorman was even more emphatic. “The interest in digital assets from new investors has accelerated — not slowed down,” he said. “Any slow down with allocations is more a function of summer than it is price.”

A boom-and-bust dynamic?

Still, there are valid reasons why the demand for crypto could be seen as faltering. “There is little doubt that the boom and bust dynamics of the past weeks represent a setback to the institutional adoption of crypto markets and in particular of Bitcoin and Ethereum,” a JPMorgan strategist said in a report in June.

“Of course, the crypto markets have indeed been going sideways,” Lex Sokolin, head economist at ConsenSys, told Cointelegraph, adding, “The drivers are some combination of pushback to mining, global macro risk-off trends and momentum slowing on sentiment/meme trading.” But the underlying fundamentals are solid, Sokolin continued:

“We see immense demand from institutional investors for both crypto assets, as well as the equity of crypto companies. We can point to the $18-billion valuation of FTX and $9-billion valuation of Bullish as recent evidence, both funded by some of the world’s largest hedge funds.”

The events that have unfolded since the start of the summer have caused some investors to slow down and conduct a bit more research, acknowledged Hougan. China’s banning Bitcoin mining at around the same time that United States authorities seemed to be ramping up efforts to regulate crypto forced investors “to pause and reflect. The good news is that both of these developments are long-term positives for the market even if they introduce short-term volatility.”

Still, the roller coaster ride of recent months is a reminder that BTC and crypto, generally, have still not solved their volatility problem. “Volatility scares everyone,” observed Dorman, adding, “Volatility is more accepted when you trust the value of the underlying asset — that’s the biggest hurdle with institutional investors in terms of their education.”

Related: On the fence: If this is a crypto bear market, how long can it last?

The only notable shift Dorman has seen in recent months “is that new investors are way more interested in DeFi, gaming and other cash-flow producing assets than they are in Bitcoin or Ethereum — or ETH competitors.”

“Decentralized finance continues to mature and process transactions and loans,” said Sokolin, adding: “NFT-based platforms are seeing major studios and creators shift to new tokenized business models. Computational chains like Ethereum are clearly having a moment. It is also possible that we will see more DeFi-type activity anchored to Bitcoin, Solana or other chains, and that will grow the entire pie.”

Playing the “long game”

Crypto continues to face challenges, though. “We expect to see significant new activity on the U.S. regulatory front, for instance, and if regulators over-reach, that could have a material negative impact on crypto,” Hougan explained, while going on to add, “Of course, the flip side is true, too: If regulators put forth balanced regulation, that would lay the groundwork for the next great crypto bull market.”

D’Anethan believes that many of crypto’s technological challenges, such as scalability and transaction speed, have “already been looked at and somewhat resolved,” but there is still a need to find the right balance between “network effect” and efficiency, noting:

“BTC is a well-accepted crypto but, technologically speaking, is not the best user experience. A new cryptocurrency might be great, but if nobody uses it, it doesn’t do much good. This is a self-balancing act that still needs to play out.”

Overall, long-term trends remain positive, suggested Dorman, “We are in a multi-decade secular uptrend. [...] Every single near-term challenge is a long-term positive — regulation, China dispersion, etc.,” while Sokolin, for his part, called attention to a “deep investment in the digital asset long game by sophisticated participants that is happening now.”