This past week didn’t provide much price action (crypto was mostly flat week-over-week), and that was a welcome calm. The lack of volatility helped Bitcoin and the rest of the crypto market lock in its first positive month since July, snapping a 6-month losing streak of negative returns. February’s gains (Bitcoin +12% / crypto indices +15–18%) provided some much needed relief for the industry.
Bitcoin Monthly Returns
Coincidentally, there is a noticeable change in investor sentiment right now, both from existing crypto investors and those on the fence peeking in. But it isn’t the price action that has people so excited — it’s the adoption. And by adoption we mean both actual use cases for digital assets on blockchain (the number of unique BTC addresses used increased MoM to an average of 473k vs. 439k in Jan, and is now up 7 out of the last 8 months) as well as adoption from incumbent financial powerhouses who are now entering the industry at a rapid clip (Facebook, Fidelity, Nasdaq, JP Morgan, Samsung, etc).
We’ve used the below table a few times in the past, but it’s worth mentioning again that just about everything in and around crypto seems bullish for the future of digital assets. And we’ve also noted that price is often a lagging indicator, so even after February’s gains, we could still be in the early innings of a massive recovery in asset prices.
This leads to a paradox. Just about everything long-term for digital assets is bullish, yet it’s still incredibly difficult to value and therefore have conviction on many crypto-assets that exist today, including to some extent Bitcoin. The bull case is simply that others are bullish enough to keep building / launching until we figure out the best use cases and valuation techniques for these assets.
Despite this paradox, the bull case just got a lot stronger now that the “others” include global financial and technology giants that bring with them enormous, engaged user bases. Crypto adoption, and thus price appreciation of digital assets, is solely based on network effect and growth of users, and while it’s exciting and fun to cheer for the grassroots efforts of new challengers in the space, it’s much more plausible that the industry will piggyback on the incumbents with already massive networks.
The Macro Factors Affecting Crypto Prices and Blockchain Adoption
New technologies without distribution often fail to materialize. There is a good reason why Betterment and Wealthfront have largely stalled. Their technology is amazing, but also easily replicable by financial advisory powerhouses with larger distribution capabilities, who are now offering similar services to their clients. There are only so many new, young investors willing to start from scratch with unproven platforms like independent robo-advisors. Most everyone else just wants their existing advisor to keep up with new and better wealth management tools. Distribution and brand matter.
So while there are a lot of polarizing opinions on Facebook and JP Morgan’s entrance into the digital asset world, and the long-term importance (or lack thereof) of their token offerings, the fact of the matter is their day 1 will be bigger than our year 10. We need them, and we should embrace them. For example, I for one hate video games and especially hate Angry Birds. That is certainly NOT why I got an iPhone in 2010. But once in the iOS app store ecosystem, Angry Birds somehow made it on my phone and I played it many times. It doesn’t really matter what gets you into the ecosystem; once there, every blockchain app, and every digital token, becomes much more readily accessible.
After a very strong February, crypto was pretty quiet last week but feels heavy heading into this week.
And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.
The Arca Portfolio Management Team
Jeff Dorman, CFA — Portfolio Manager
Katie Talati — Head of Research
Hassan Bassiri, CFA — Junior PM / Analyst
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