Finance Gerontocracy, Margin Calls, and Growing Institutional Adoption: Is the Current Bitcoin Carnage Milder Than Previous Bearish Episodes?
The oracle of Omaha, Warren Buffett, was recently included in the so-called “finance gerontocracy” by the co-founder of Paypal and Palantir, Peter Thiel, for maintaining an archaic and overly bearish stance on Bitcoin and other cryptocurrencies.
Well, Buffett has now struck back, recently stating that he would not buy Bitcoin at even a price of $25. Readers can watch the entire clip here:
As the war of words around Bitcoin’s prospects continues, MicroStrategy (NASDAQ:MSTR) has now issued a warning that it would face a margin call on its sizable Bitcoin stake should the cryptocurrency’s price decline to $21,000. Bear in mind that the company currently owns around 129,218 Bitcoins acquired for $3.97 billion, or $30,700 per coin. Nonetheless, the margin call only relates to the $205 million Bitcoin-collateralized loan that MicroStrategy has taken from Silvergate bank, and in the event of a trigger, the company would simply have to provide additional Bitcoins from its sizable unencumbered stake to maintain appropriate loan collateral.
Of course, we had conducted an extensive analysis on Bitcoin’s prospects over the weekend, noting that the cryptocurrency has now entered a broad area of support that extended all the way to $29,000. Buffeted by a more conducive near-term on-chain metrics setup, we continue to believe that the probability of a breach of major proximal support zones remains slim, setting the stage for a sizable bounce.
However, as we’ve repeatedly flagged over the past few months, Bitcoin’s ever-growing correlation with US stocks in general and high-beta, growth-heavy equities, in particular, is a major cause of concern. Consider the fact that Bitcoin’s 60-day correlation with the S&P 500 index is currently at 0.70 (coinmetrics), indicating that around 70 percent of the cryptocurrency’s moves replicate those of the S&P 500 index.
This is a major threat to Bitcoin’s narrative of being a unique asset that does not fall within the realm of traditional finance. Moreover, by failing to hold its head over the proverbial waters amid the current macroeconomic environment characterized by a fierce inflationary impulse, Bitcoin has also demonstrated that it can’t function as a viable inflation hedge, at present at least.
So, why has this correlation regime been so persistent? Well, institutional adoption is a double-edged sword. On the one hand, as more and more institutions dabble in Bitcoin, the cryptocurrency benefits from increased liquidity, which should dampen its legendary volatility.
In fact, as per a recent report by VanEck, the institutional adoption of Bitcoin has never been more vibrant than in 2022, when so far this year, nearly 160 separate 13F filings by various hedge funds have referenced their Bitcoin holdings.
This onslaught of new liquidity is having a noticeable impact on Bitcoin’s volatility. For instance, the current Bitcoin price of $33,092.5 corresponds to a peak-to-trough decline of 51.19 percent so far, which is substantially less than the typical bear market drawdown of over 80 percent. Of course, the current bearish cycle is far from over, and it remains to be seen whether Bitcoin can stave off a more typical drawdown in the current cycle on the back of additional liquidity from institutional investors. Even if Bitcoin’s price bottoms at the $21,000 price level, it would still correspond to a peak-to-trough decline of 69 percent, well short of the typical 80-percent-plus drawdowns.
The graph above, sourced from the VanEck report, clearly shows how the cryptocurrency's relative volatility has fallen in relation to the Nasdaq 100 index (as of the 26th of January 2022).
So, while institutional investors are bringing additional liquidity to the table that is playing an important role in tamping down Bitcoin’s legendary volatility, the downside comes from the elevated correlation of the cryptocurrency with other traditional financial assets, particularly high-beta US stocks.
The rationale here is simple. Institutional investors are currently lumping Bitcoin with other high-risk assets, leading to similar liquidation waves and soaring correlation.
We had noted over the weekend how the Federal Reserve was trying to hammer risk assets in order to curb the wealth effect pervading the US economy, thereby hoping to subdue consumer spending and cool down the current red-hot inflationary impulse. As long as this paradigm continues, US equities will not be able to recover, resulting in waves of institutional selling that would continue to extend to Bitcoin, given their supposedly similar risk profiles.
It is a certainty in finance that trends never last. Consequently, we do believe that the prevailing hellish regime for Bitcoin will eventually end, either as a result of the inflationary impulse dying down or institutional adoption of the cryptocurrency reaching a critical mass that then frees the cryptocurrency from the clutches of the prevailing high correlation regime with US equities.
Warren Buffett thinks Bitcoin is not even worth $25. Peter Thiel, on the other hand, believes it is worth at least $4 million. Given Buffett’s historical aversion to anything related to tech – after all, he only bought Apple back in 2016 after its ascendancy had been proven beyond doubt – we would take Buffett’s outrageous prediction with a tiny grain of salt.