Bitcoin rallies off ~$30k support again; crypto outlook remains choppy for now; macro picture softening; Delta variant may help alleviate a key risk for crypto (Fed tapering); Fidelity institutional survey highlights the big picture opportunity

Bitcoin rallies off ~$30k support again but crypto remains in a choppy market

Crypto is still in a doldrums of summer as many investors have taken a sell in May and go away approach. We think these combined factors below are partially why crypto remains in a choppy market environment for now:

-Institutional investors taking money off table early in year locking in performance fees

-Many institutional investors who were trading crypto are away for the summer months

-Less institutional capital, more retail, lower volumes, and lower liquidity = choppy VOL rising

Yet, Bitcoin continues to hold onto the ~$30-40k trading range it’s been in since late May after briefly falling below $30k yesterday and rallying today.

Source: FSInsight, Bloomberg

Macro picture softening has been a headwind working against crypto

We think a large reason for the recent selling and bounce today has been driven by the broader macro market environment. And we can’t ignore that some macro factors that were supporting the crypto markets are less rosy, at least for now. There is a lot going on in the chart below, so let’s break it down:

• S&P 500 which had been hitting all-time highs started getting choppy back on July 12^th
• The 10Y treasury has continued falling possibly signaling concerns over slowing economic growth
• High yield started pulling back on July 6^th as the market started to take a more risk-off approach
• The Dollar has been getting stronger (inverse on chart below) which tends to be a crypto headwind
• MSCI emerging market currency index has been wakening alongside dollar strength which is another headwind for EM crypto economies

We’ve seen most of these markets have a strong bounce the other way over the past day and that has benefited today’s crypto rally.

Source: FSInsight, Bloomberg

Delta variant COVID cases picking up may be sparking concerns over the reopening recovery

One of the main fears likely spooking the markets are concerns over the new COVID delta variant spreading.

Source: FSInsight, Google

US hospitalizations, which have been falling since early 2021, have stared to turn up recently, which may be concerning for the re-opening recovery.

Source: FSInsight, State Health Departments

Could the Delta variant help take one of the biggest risks to crypto – the fed tapering – off the table for 2021?

COVID is a tragedy and we are not wishing for an increase in cases. But, if we do get a continued up tick – what could it mean as a second order effect for policy and crypto?

Crypto markets peaked back in April alongside peak liquidity. We’ve since seen concerns over the Fed dot plot signaling a possibly faster than some expected removal of the pandemic-era stimulus due to fears over rising inflation.

But, in the face of the delta variant, depending how it plats out, it could cause the Fed to be more conservative in its timeline for tapering its liquidity program. If tapering was taken off the table for 2021, we think that would remove one of the biggest risks to the crypto market.

Source: FSInsight, Google

Fidelity Digital Assets institutional investor survey highlights the long-term opportunity despite the choppy near-term outlook

Although we remain in a choppy market, we think it’s important to remain focused on the long term crypto story as well. Yesterday, Fidelity released its Fidelity Digital Assets Survey for 2021. Institutions continue to adopt exposure to crypto assets and continue to see increased exposure in the future.  

Source: FSInsight, Fidelity

Among those surveyed, institutional investors in Asia have the highest exposure to digital assets, followed by the EU and then by the US.

Source: FSInsight, Fidelity

To think about the potential for crypto flows if institutions continue to increase their digital asset exposure, let’s look at the size of the global institutional assets under management which are expected to grow north of $100T over the coming years.

Source: FSInsight, Boston Consulting Group

Based on the Fidelity survey, institutions with crypto exposure went from 36% to 52% from 2020 to 2021 and is expected to go to 71% in the future. Using these numbers as rough guidelines, we can look at the implied crypto assets under management by institutions based on penetration and their portfolio allocations.

Source: FSInsight

Although the Fidelity survey did not provide data on the allocation weightings of digital assets within institutions portfolios, we can look at a recent survey by PwC on % of hedge fund AUM in crypto assets for those with exposure.

Most investors have less than 1% exposure, which implies there could be room for both penetration and allocation to grow from current levels.

Source: FSInsight, PwC

We model out what the flows could be based on increases in penetration and allocation weightings to digital assets below. We use the expected change from Fidelity digital asset survey (from 52% to 71%) as a guideline. 

Source: FSInsight

But a net dollar invested equates more than a dollar of asset value due to marginal liquidity. Using the in flow numbers from above, we apply a range of flow multipliers (see prior reports – post election outlook for why we use this range) to approximate the implied increase in crypto market value and future market cap. Note, in the below analysis we skip one step and add the current $1.3T market cap to the value increase to get the table below.

Source: FSInsight

We think despite the recent crypto volatility and near-term choppiness, its important for investors to keep perspective of the bigger picture and increasing institutional flows story that we think will benefit the asset class over the years to  come.