What is the Investment Outlook for BTC and Cryptocurrencies?

(Please note that our senior digital analyst David Grider, who writes our weekly crypto column, is sitting in for Tom Lee in this particular note. This is part two of a three-part series. Tom will return to writing Tom’s Take shortly) Part 1 is available here. Part 3 is available here.

How should investors frame crypto’s drivers and was the recent move a justified fundamental deterioration or an opportunity?

1. Emerging Market Play

Crypto market growth resembles that of an emerging market economy that’s recently opened to the outside world seeing new capital inflows and growth.

Remember, that like all emerging markets, it is influenced by macro external forces and shocks, and it is still early innings yet and idiosyncratic boom/bust drives may dominate.

2. Digital Gold Thesis

I don’t think that a month of trading action, bad as it has been, should outweigh 10 years of noncorrelation.  Both gold and Bitcoin’s reaction to the turmoil has been mixed. Bitcoin’s correlation to gold has risen since the last sell-off now that the panic of the crisis has subsided, and it’s now proving to be an uncorrelated hedge asset again. One more point, crypto has been a reliable store of value if bought cheaply.

3. Tech Disruption Trend

There are secular technology growth drivers favorable in the long run. My bottom line is that crypto drivers are currently mixed, and the net outcome depends on the weight of each. Nevertheless, there are potential crypto catalysts are on the horizon, such as:

• Crypto Market Structure — In the way of supply-side dynamics, for example, there is the upcoming halving, which should reduce new supply.
• Investors holding coins at an unrealized loss tend to not sell until prices reach prior breakeven levels, which tends to reduce sell pressure from existing supply. And now that there’s been some deleveraging, that reduces the downside squeeze risk.

On the demand side, the dynamics could improve if investors re-leverage to go long.  The expansion of a killer app like Decentralized Finance (DeFi) on Ethereum or other’s networks could increase the fundamental usage of crypto. And as liquidity increases higher demand could squeeze the shorts.

• Central Bank Fiscal Response — Other potential catalysts could come as a liquidity spillover from improvements in U.S. financial markets, and from potential global inflationary pressure.
• Macro Market Influence — Finally, the stock market looks like it may have bottomed and may continue recovering which could help crypto prices. On the macro side, catalysts could include a sustained rise in gold and more geopolitical shocks, whether military or economic.

Part 1 is available here. Part 3 is available here.

(This ends Part 2 and stay tuned for Part 3, which will discuss the risks to BTC and cryptocurrencies.)