First the rush, then the reckoning, now the reality. With Bitcoin and other cryptocurrency’s latest bull run having come decisively to an end, it is perhaps an opportune time to reflect on the changes it may have left in its dust, and how the market may continue to develop. 

One big shift was the number of people investing in Bitcoin and other cryptocurrency. During the run-up to the market’s peak, investors piled into crypto coins, driving prices up before the correction that saw a number of them lose their shirts. As might be expected with such a new asset class, the intentions and motivations of those investors could not always be readily identified beyond the obvious desire for returns.

The soaring value of cryptos, particularly Bitcoin, could not have occurred without new investment, one of the main drivers of which was increasing institutional acceptance of digital assets, which began accelerating at the end of 2020. Institutional interest in major cryptocurrencies such as Bitcoin and Ether was bolstered by an abundance of talk about helpful regulation for the sector. It seemed to be only a matter of time before all the attention began to bear fruit.

Lennix Lai, director of crypto exchange OKEx, said that in the run-up to the cryptocurrency market’s peak, the exchange had seen “at least five times growth … in terms of new users — new users as in new institutional, new retailers — totally new kinds of people.”

“We [saw] a tremendous increase of three to five times in wallet address growth, OKEx user growth, exponential growth [in] institutional [interest] as well in terms of trading volume, [assets under management] and the number of users,” Lai said.

Heart vs. head

There’s an old saying that posits, “Everyone’s a genius in a bull market.” But the recent crypto price corrections revealed some telling signs of the sophistication of the market. Eqonex head of exchange sales Justin d’Anethan said he saw a “more reactive or emotional tilt” to retail investors’ behavior. 

Plenty of investors bought in during the highs, only to suffer severe losses amid the panic selling that followed. Long-term cryptocurrency traders were more likely to “hodl” — hold on for dear life — and even add to their positions at the bottom of the market, when Bitcoin was trading close to US$30,000

“It’s fascinating to see whales buying more, miners not selling newly minted coins, and long-term holders refusing to budge,” d’Anethan said. “For anybody who would’ve been in the space for at least six months, they’re still in profit, or at least at break-even. The shorter-term traders and speculators are feeling the most pain and acting it out, which isn’t playing in their favor.”

Institutional adoption has also had a huge impact, and seems to have remained undimmed throughout the market downturn. Software and cloud company MicroStrategy increased its crypto holdings to more than 100,000 Bitcoins late last month, and the company’s CEO, Michael Saylor, has become a well-known proponent of cryptocurrency. In April, Grayscale added over US$1 billion to its Bitcoin and Ethereum trusts, bringing its total crypto assets under management to US$34 billion. Grayscale allows the trading of shares in trusts that are holding certain cryptocurrencies.

However, a recent report by analytics company Glassnode shows that Grayscale’s share price has been trading at a persistent discount to the net asset value of Bitcoin, which may indicate that institutional interest in cryptocurrency is cooling.

Some experts have warned against assuming that big market players have fixed behaviors, however. 

Ben Caselin, head of research and strategy at exchange AAX, is skeptical of institutional market behaviors such as short squeezes, fear of missing out, hodling and manipulation. Caselin said it was too early to determine whether there would be any change in behavior among larger crypto market players. 

“Bitcoin was created to counter the imbalance created by the institutions and the government/Federal Reserve,” he said. “It is likely that the types of dynamics we have seen between early retail traders will be repeated between institutional investors and, potentially later on, governments.”

Funny money

One of the most talked-about phenomena to emerge just before the crash was joke coins, or memecoins. Pioneered by the rise of canine-themed Dogecoin (DOGE) — which subsequently spawned copycat memecoin Shiba Inu (SHIB), memecoins gained huge popularity in May, forcing a reckoning of perceptions of value in the industry. Some thought assets whose value was based purely on the popularity of a joke discredited the entire sector. Others saw memecoins as a radical shake-up, proof that the industry was capable of reinventing itself, and regarded the popularity and accessibility of the currencies as helping to broaden its appeal.  

“Memecoins do appeal to entirely new crypto traders who might be moving away from stocks and find memecoins an easy way into crypto, and to crypto whales who have enough capital to allocate some of it to such highly speculative markets, which are quite easy to manipulate,” Caselin said. “There is an argument to be made for memecoins not as a form of entertainment, but as an expression of loss of purpose and meaning — a kind of economic nihilism.”

One new retail crypto trader looking to move away from stocks told Forkast.News that after investing in mid-December, following a few years of exploring stock markets, he had initially been impressed by the significant returns he saw early on investing in Bitcoin and Dogecoin. “Tom,” as he preferred to be identified for this article, bought the latter simply because he thought it would be funny. Both crypto investments paid off, and Tom remains pleased with how his portfolio has performed — staying in the black despite the correction.

Tom, who is studying a degree course in accounting at an Australian university, said he had enjoyed learning about the crypto industry once he was invested in it, noticing similarities with stock trading and how different processes were used in each to achieve similar goals. He also said that as a fan of sci-fi, he was fascinated by the philosophy and technology behind cryptocurrency. 

“The decentralization was interesting,” Tom said. “I don’t think it was the driving force that led me to invest — it was just something interesting about the process, how Blockchain works and its utility, and that sort of thing. Frankly, it’s just sort of something that I don’t understand and would like to try and understand more.”

After Coinbase was listed on the Nasdaq exchange in April, good-news stories coming out of the industry seemed to dry up. Not long before, stories such as Bitcoin halving and Ethereum’s gas upgrade had helped to keep interest and market demand high. Then a series of events, such as a regulatory crackdown in China and Tesla founder Elon Musk’s announcement that the electric carmaker would stop accepting Bitcoin as payment for its vehicles, preceded the massive sell-off.

With more than 57 million Twitter followers, Musk has had an influence on the market over the past year that can be described only as outsized. Even last week, a simple tweet from him saying he would name his pet Shiba Inu — the breed of dog at the center of the Dogecoin meme — “Floki” sent the price of popular memecoin SHIB up 38.4% in a matter of days. It also spawned a slew of spinoff memecoins, including the Floki Inu token, of which 100 million were distributed on the Binance Smart Chain.

Portuguese footballer Christiano Ronaldo may have managed to wipe US$4 billion off Coca-Cola’s share price by suggesting that people should drink water, and crypto has been particularly sharply criticized for being vulnerable to such volatility because normal market fundamentals don’t seem to apply. For long-term investors, however, the underlying technology is still sound.

“If we’re looking at Blockchain, there are so many applications, from my perspective as an investor and a businessperson, it’s like the internet in the early days,” said Jon Michail, CEO of consultancy firm Image Group International and a long-term investor. “That’s the way I treat this — as a future investment. It doesn’t mean I’m going to put all my life savings into it, but I wouldn’t do that with the safest of bets anyway.”

Beyond discussion over fundamentals, Michail said trust was a significant factor driving people into crypto. From events such as the global financial crisis in 2008 — soon after which Bitcoin was created — and the GameStop stock bubble this year to the lack of action following the government-backed inquiry into banking in Australia, his home country, he said a lack of trust had affected all aspects of the market.

“Trust is a serious problem all over the planet right now,” Michail said.

Testing times

Trust may not be the first word that comes to mind, given the way in which many investors who had thrown their lot in with cryptocurrencies got burned, so perhaps the willingness with which they committed to the emerging asset class might be better understood as a propensity to experiment in a market finding a level.

“A new asset class like Bitcoin is going through its early stages of price discovery … [and] will continue to be volatile,” said Jeff Yew, CEO of Monochrome, Australia’s first fund to offer institutional-grade exposure to Bitcoin. “But I think without that volatility you can’t see the kind of historic gains that Bitcoin has demonstrated because an unbridled free market like Bitcoin promises that no one controls it. That’s the beauty of it. Versus you have a mature market that has a central bank where policy that’s always combating that volatility and with fiscal policies to dampen those effects.”

Yew said recent sentiment on Bitcoin had negatively affected the market, but that it could in the long run turn out to be a net positive for the industry. He said the recent crackdown on crypto in China, for instance, could lead to greater opportunities down the road.

“China’s moves to ban Bitcoin to arguably push for a [central bank digital currency] because they might view it as a competitor — it’s more of a strategic blunder for China because that means that [the government will] have less control over the network over the long-term period,” he said. “This mining power, this distribution of this investment, and how it’s redistributing to the rest of the world for refuge, is a huge gain for the decentralization of Bitcoin.”

Regardless of further regulatory action in China or elsewhere, Lai said the crypto market had stabilized for the moment amid a relatively benign regulatory environment, and that most pending government action was already priced in.

“I [expect to] see the [Bitcoin] markets mostly trading somewhere between US$30,000 to maybe US$45,000 in the upcoming three to six months,” Lai said. “For the investor, for the retail participants, right now the downside risk is actually pretty small. If you don’t have the urgency to try to cash out, you don’t need to sell your Bitcoin. You just need to hold it. And I think the overall trend for crypto is actually pretty optimistic.”