When cryptocurrency came about in 2009 with the launch of Bitcoin the world had no idea what was coming. Today cryptocurrencies are playing an ever-increasing role in everything from the decisions governments make around the world to how financial institutions strategically allocate capital and this blog explores that more.
Looking at Bitcoin prices over time, especially over the past 6 months, it should come as no surprise that unsophisticated market participants/weak hands have been liquidating Bitcoin with the most recent steep price decline though the most savvy see asymmetric opportunities that present when markets reach higher levels of uncertainty/pessimism combined with extreme volatility.
Another constant roadblock fundamentally for cryptocurrencies is that they don’t operate or function like most other financial derivatives/publicly traded securities. This is in part based on evidence that Bitcoin has been negatively influenced/exploited by bad actors for the benefit of terrorist organizations, hackers, money launderers and drug traffickers around the world.
In addition, the price action of Bitcoin has been heavily skewed by social media conversations which has become a key input for driving volatility and influencing the world today. One of the first and biggest indicators that came out of nowhere was the foundational GameStop short squeeze, which helped institutional investors from all walks of life (family offices, hedge funds, etc.) wake up to the power of social media. Yet today they’re still behind the eight ball trying to catch up.
The moral of the story for family offices, hedge funds and institutional investors alike is that being the smartest and most successful in the past didn’t require understanding social media’s impact as a key input for financial modeling, but in the future it certainly will.