What a difference a year or two makes. It was about this time in 2021 that Bitcoin was hitting all-time highs, above $60,000. Fast forward two years and the price has declined by more than half. More importantly, trading volumes are at four-year lows.[1]
In 2021, Bitcoin and other digital assets were all the rage among investors, with institutions left and right actively exploring how they could promote crypto as an alternative investment. Today, even with a Bitcoin ETF on the horizon,[2] it is simply not clear that investors particularly care. Virtually no institutions are expanding in the crypto space, and the failure of firms like FTX and Celsius, along with reported troubles at Binance, are all tarnishing the halo that crypto once held as an investment.
Yet there is more going on here than meets the eye, and the problems with crypto are not entirely the industry’s own making. The reality is that gold has also been underperforming of late—basically flat since July of 2020, despite the rampant inflation against which it is supposed to serve as a hedge. The picture for silver and platinum looks similar despite their uses in industrial applications, and even copper has been performing below expectations.
The reality is that much of the movement in precious metals and crypto assets over the last decade was a result of the Fed and interest rate policies. When interest rates are near zero, there is little real cost to speculating with money, even borrowed money, in non-cash flow generating alternatives. These days, interest rates on even short-term Treasuries are at roughly 5%, and the cost of holding “money” in any form—green pieces of paper, gold, cryptocurrencies, etc.—is very real. For example, $100,000 in Bitcoins or gold now has a real annual cost of roughly $5,000 even on a risk-free basis. What kind of expected return would induce an investor to put their money into something risky like Bitcoin, 10%, 25%, 50%? Regardless, for now, it is obvious that many investors don’t see enough return incentive to put new money to work, hence the decline in trading volumes and price.
The question, then, for alternative investors that want to go long with these assets is, when will the Fed lower rates? Or perhaps will it lower rates? JPMorgan Chase CEO, Jamie Dimon, was recently talking about a world with 7% interest rates in an interview with Bloomberg TV. That could mean years of further turmoil for crypto and precious metal investors. One can argue about whether Bitcoin and crypto, in general, should be seen in an equivalent manner as gold and precious metals, given the history the latter holds, but that argument is secondary to the reality that higher interest rates mean higher discount rates, which in turn mean a lower present value on all of these assets.
Despite the popular narrative, the correlation between inflation and price appreciation across the alternatives spectrum has been much less robust than expected. There has been no shortage of inflation, and yet investors have not seen anything like a corresponding offsetting move in Bitcoin, Ethereum, gold, silver, or just about any other similar alternative. Given this and the prospect for potentially higher rates—or at least “higher for longer,” investors looking at any of these alternative investments need to accept that these assets may be out of favor for years to come.
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[1] See: https://www.cnbc.com/2023/08/28/bitcoin-trading-volume-is-at-its-lowest-in-more-than-four-years.html
[2] See: https://www.cnbc.com/2023/08/29/first-bitcoin-etf-could-be-coming-soon-as-court-rules-in-favor-of-grayscale-over-sec.html