During the last week of September, the major cryptocurrencies got crushed. Bitcoin fell more than 20% from September 21st through September 26th and then slightly rebounded on the 27th by a little less than 2%. A 20% drop for the most well-known cryptocurrency is not uncommon these days, as it fell that much back in July. However, that doesn’t make it an easy pill to swallow when it happens.
But while Bitcoin fell 10% on September 24th, it's closet rivals, Ethereum, Ripple, Litecoin, and bitcoin cash fell even more, somewhere between 15% and 20% respectively. The likely cause was the lack of interest from institutional investors after the highly anticipated Bakkt crypto platform began trading its “physically” settled bitcoin futures contracts.
The Bakkt platform was announced more than a year ago and had partnerships with Microsoft and Starbucks and was being touted as a way for institutional investors to get involved with cryptocurrencies. The platform allows futures trading of crypto’s but settles the order with physical coins, not cash like other crypto futures platforms currently offer. The thinking was that because the futures contracts had to be settled with actual coins, this would increase the demand for the different crypto’s being traded through the futures contracts.
However, during the first hour, the platform was live, only five contracts were traded, and even after ten hours, only 28 contracts had traded hands. Many industry experts, both who follow the crypto markets and general futures contracts actually have come out and stated this sort of activity is normal for the first few days of a new commodity being offered through regulated futures contracts. They claim some brokers aren’t ready to clear it, while others want to wait and see how things go, while others may not even have the tickers populated on their risk systems.
Su Zhu, the chief executive of Singapore-based hedge fund Three Arrows Capital continued by saying, “Bakkt will be likely first a trickle and then a flood.” If the new futures contracts do pick up in volume, that would likely be a sign that the price of Bitcoin and other cryptos may soon be moving higher, since these contracts must be backed by actual ownership of the coins.
However, with the current political attention on cryptos, mainly due to Facebook’s venture into the realm, it’s unlikely that the big institutional investors will get involved in digital currencies in a meaningful way until we have more legal clarification from the Federal Government. Simply put, most institutional investors can’t afford being called out by a Presidential candidate, let alone Donald Trump, for owning Bitcoin or other cryptocurrencies until doing so has been deemed legal by the appropriate government agencies.
The fact that the State Department, or the FBI, or the SEC hasn’t come out and said that it is illegal to own crypto's, still doesn’t mean that it's legal to own them. And because of this issue, big money managers can’t afford to have a large portion of their portfolio tied up in these investments and risk the Federal Government coming and confiscating these investments if they are deemed to be illegal sometime in the future.
Over the years, I have made it very clear that I was not a fan of the new cryptocurrencies from an investing standpoint. I believe the technology is intriguing and it will survive and improve our world in the future. However, Bitcoin, Ethereum, Litecoin, or whatever crypto you prefer still has no tangle value, and because there are too many ‘unknowns’ from a legal standpoint, I remain steadfast that there are easier ways to make money in the markets than investing in cryptos.
With that being said, history has shown us that Bitcoin can take a beating, fairly often, and keeps coming back. The last time Bitcoin fell 20%, in early July, it was back to nearly those same levels by early August. Even last November, Bitcoin fell nearly 50%, from over $6,000 per coin down to the mid $3,000 range, and within six months it was trading above the $6,000 mark. And despite the recent 20% cut, Bitcoin is still up more than 25% over the past year. Bitcoin, if nothing else is resilient and despite not believing in it from an investment standpoint, I also wouldn’t short this thing.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not own shares of any asset mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
