Cryptocurrencies are in danger, Cathie Wood underestimates them

Key points to remember

• Cathie Wood says institutions could move away from cryptocurrencies
• She believes they will allocate more to Bitcoin and Ether once they take the time to study the cryptocurrency sector.
• I think that may be overly optimistic, that the cryptocurrency industry has taken some hits and may take longer to recover from the rough patch that cryptocurrencies are in right now.

Perhaps the most worrying thing about the last few weeks – and I think you’ll agree there have been a few – is what this all means for the industry’s reputation going forward.

Which institutions are now going to include Bitcoin on their balance sheets? Which pension funds will get into digital assets? The FTX implosion (which I wrote about in detail here) is so egregious and shocking that it is delusional to expect anyone connected with traditional finance to enter the sector. Is the damage irreparable?

Cathie Wood hints at institutional pushback.

In that sense, I thought theinterview Ark Invest founder Cathie Wood’s interview with Bloomberg last week was revealing. Long known for her ultra-modern views on all things Bitcoin, she even reiterated in the interview her confidence in her prediction of the price of Bitcoin, which she believes will be worth $1 million per coin by 2030.

This was not a surprise, nor was it totally unexpected. Wood is convinced that Bitcoin will change the macroeconomic landscape in the long term. He has positioned himself very aggressively in the market, betting on risky tech stocks, Bitcoin and other assets that have struggled amid the transition to a new interest rate paradigm, as shown by the performance of his flagship ETF below:

However, I thought there was something more remarkable in his interview. ” However, I think the only thing that will be delayed is that maybe the institutions will take a step back and say, “Okay, do we really understand this?” ,a- he said.

This alludes to the great danger here. Throughout the pandemic, one of the most optimistic things for bitcoin was the tendency of institutions to flock to the sector. There was Tesla. There was the ETF conversation. There was the grayscale. There were public mining companies. There was Coinbase floating on the exchange. Even El Salvador declared Bitcoin as legal tender.

But now that the low interest rate environment is over and liquidity is being sucked into the economy, Bitcoin and cryptocurrencies are facing something they have never faced before: a downturn in the overall economy.

Let’s not forget that Bitcoin was launched in 2009, in the biggest bull market in history. It has not yet been tested in a bearish macro climate, so this is all unprecedented. And in the face of this test, the cryptocurrency is under severe stress.

BlockFi, Celsius, Voyager, Three Arrows Capital and all the other failed companies, now joined by FTX, have also painted cryptocurrency in such a bad light that it’s not surprising to hear analysts warn of institutional adoption setbacks. Wouldn’t it be more surprising if there weren’t?

Optimism

I should note that Wood went on to say that he thought Bitcoin came out “smelling like a rose” from all of this. While I wouldn’t go that far – in my opinion, the entire industry is seeing its reputation tarnished – I understand where he’s coming from.

But while Bitcoin has no counterparty risk, and is therefore theoretically safe from the kinds of implosions we’ve seen in centralized companies like FTX, this is the real world. And in the real world, for the ordinary citizen to have access to it – let alone institutions – centralized companies are needed.

And until greed, reckless leverage, naive risk management and outright fraud (not naming names) in the industry cease to exist, Bitcoin will not gain significant traction in the traditional financial space. Institutions will be much more reluctant to invest in this space after so many high-profile blowups. Regulation is creeping in. Returns are no longer skyrocketing.

That’s why I disagree with Wood’s optimistic tone later in the interview:

” And once (institutions) do their homework and see what’s happened here,” Wood said, “I think they’ll feel more comfortable moving to Bitcoin and maybe Ether as a first stop, because they’ll understand it better.”

For me, understanding Bitcoin more also involves understanding that it continues to operate as a very high-risk asset, in what is no longer a zero-rate environment. While the long-term view may be that Bitcoin is a reliable hedge against inflation, it is not now, and that’s what asset managers will realize.

The cryptocurrency has also left a bad taste in the mouths of everyone who has touched it this year. FTX is but the latest embarrassment to the industry, as the world looks on with a mixture of smugness, pity and disgust. In this context, the reputation of the entire space has taken a hit.

And as interest rates rise, the cost of living crisis increases and data continues to point to a struggling economy, cryptocurrency will take a little longer to recover than Cathie thinks.