Investors would be justified in anticipating that this volatility will extend to the cryptocurrency market given the turbulent news cycle that has dominated airwaves, both domestically and abroad. Particularly Bitcoin, which has a history of having higher-than-average volatility, seems to be an asset that would reflect this higher volatility. To the amazement of some market observers and investors, the price of bitcoin has instead remained stable for the past few months.
This price stability has persisted despite the following factors: 1) Blackrock and numerous other significant TradFi institutions submitted ETF applications; 2) the SEC partially lost its legal battle against cryptocurrencies; and 3) the Federal Reserve is still actively debating the possibility of a U.S. CBDC as well as additional regulations for banks operating in the crypto space.
There have been claims that the recent price stability is the result of investor exhaustion and apathy. This appears to be a fair judgement given that prices are still well below all-time highs, Coinbase is currently involved in legal proceedings against the SEC, and the fallout from FTX continues to hang over the entire market.
But it doesn’t appear that institutional interest in cryptocurrencies and uses for tokenized assets can be adequately described by apathy or exhaustion. For proof of this, one need only look at PayPal’s recent announcement that it is releasing a powerful native stablecoin.
Let’s look at why this period of stability is good for bitcoin and the crypto space as a whole to demonstrate that price stability does not imply apathy and exhaustion.
Stability Does Not Mean Weaker
During periods of price stability, including the current run, one frequent argument has been that this price stability is indicative of a weaker hunger for bitcoin and decreased interest in crypto in general. This is a superficial answer that leaves out a number of crucial factors that propel the ecosystem ahead. According to data, throughout this time both the hash rate and network growth have showed signs of progress, suggesting that beneath the calm surface there is active activity.
TradFi has persisted in making sizeable investments in the crypto asset industry, and recent developments towards the creation and promotion of an increasing number of products and services (such as the numerous ETF applications recently made) show that the market is about to change significantly. The decrease in price volatility surrounding bitcoin and other crypto assets should be seen as both a cause and an effect of TradFi’s increased interest in and investing in these assets. Major investment trends are driven by passive investors or by automated investing algorithms, neither of which tend to enjoy sharply fluctuating prices. This tendency is crucial for the long-term viability and sustainability of the crypto asset sector.
Large passive investors like pension funds and asset managers typically drive market direction and trends, while Redditors and trade threads on social media often take the lead in the debate regarding the cryptocurrency sector. Wild fluctuations in valuation do not support the stable returns stakeholders demand or the long-term decisions fund managers must make. Growing interest in TradFi is both a source of lower volatility and a result of it.
Crypto Is More Than Bitcoin
It’s important to emphasize that there are many more crypto assets than only bitcoin. The ecosystem for tokenized asset products and services is quickly increasing, despite the fact that its continues to dominate corporate headlines and policy discussions. For instance, a sizable portion of Layer 2 and more sophisticated tokenization applications do not utilize the bitcoin network. Instead, the majority of these cutting-edge use cases are constructed on the Ethereum blockchain, reigniting debates about when the leadership baton might be passed from BTC to ETH. This trend is further demonstrated by the recent approval of an ETH futures contract offering.
In addition, other initiatives like decentralized autonomous organizations (DAOs) and the related governance tokens offer a simple business use case for those looking to gain from tokenization. Stablecoins and non-fungible tokens (those not solely focused on price appreciation) are two examples of the crypto space’s other subgroups that are continuing to grow, develop, and take center stage.
Price stability is an encouraging development for the cryptocurrency market and should be viewed as evidence of a developing and expanding ecosystem.
