Sheena Shah: When will Crypto Prices Find a Bottom?

As bitcoin has been experiencing a steep decline in the last 6 months, investors are beginning to wonder when Cryptocurrencies will finally bottom out and start the cycle anew.

Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market manipulation, and cybersecurity failures—such as the risk of hacking, theft, programming bugs, and accidental loss. Additionally, there is no guarantee that any entity that currently accepts digital assets as payment will do so in the future. The volatility and unpredictability of the price of digital assets may lead to significant and immediate losses. It may not be possible to liquidate a digital assets position in a timely manner at a reasonable price.

Regulation of digital assets continues to develop globally and, as such, federal, state, or foreign governments may restrict the use and exchange of any or all digital assets, further contributing to their volatility. Digital assets stored online are not insured and do not have the same protections or safeguards of bank deposits in the US or other jurisdictions. Digital assets can be exchanged for US dollars or other currencies, but are not generally backed nor supported by any government or central bank.

Before purchasing, investors should note that risks applicable to one digital asset may not be the same risks applicable to other forms of digital assets. Markets and exchanges for digital assets are not currently regulated in the same manner and do not provide the customer protections available in equities, fixed income, options, futures, commodities or foreign exchange markets.

Morgan Stanley and its affiliates do business that may relate to some of the digital assets or other related products discussed in Morgan Stanley Research. These could include market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking.

-----Transcript-----

Welcome to Thoughts on the Market. I'm Sheena Shah, Lead Cryptocurrency Strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, today I address the question everyone seems to be asking about the crypto cycle: when will crypto prices find a bottom? It's Thursday, August 11th, at 5 p.m. in London. 

After a 75% peak to trough fall in bitcoin's price between November 2021 and June this year, it seems like almost everyone in the market is asking the same question. When will crypto prices find the bottom? We will discuss three topics related to this question; the pace of new bitcoin creation, past bitcoin cycles and dollar liquidity. 

What can bitcoin's creation tell us about where we are in the crypto cycle? Bitcoin's relatively short history means there is little available data, and yet the data is quite rich. In its short 12 year history, bitcoin has experienced at least 10 bull and bear cycles. Bitcoin creation follows a 4 year cycle. Within these 4 year cycles, price action has so far followed three distinct phases. First, there is a rapid and almost exponential rise in price. Second, at a peak in price, a bear market follows. And third, prices move sideways, eventually leading into a new bull market. 

The question for investors today is, is bitcoin's price moving out of the second phase and into the third? Only time will tell. There have only been three of these halving cycles in the past, and so it is difficult to conclude that these cycles will repeat in the future. 

What about past bear markets? The 75% peak to trough fall in bitcoin's price and this cycle is currently faring better than previous cycles, in which the falls after peaks in 2011, 2013 and 2017 ranged between 85 and 95%. There is, therefore, speculation about whether this cycle has further to drop. 

Previous cycles have shed similar characteristics. In the bull runs there was speculation about the potential of a particular part of the crypto ecosystem. In 2011, it was the excitement about Bitcoin and the development of ecosystem technologies like exchanges and wallets. In 2020 to 2021, this cycle, there were NFTs, DeFi and the rising dominance of the institutional investor. 

In previous cycles, the bear runs were triggered by regulatory clampdowns or a dominant exchange being hacked. In 2013, a crackdown in China led to the world's largest exchange at that time, BTC China, stopping customer deposits. In this cycle, the liquidity tap dried up as inflation concerns gripped the market. 

Central bank liquidity and government stimulus fueled the speculation driven 2020-2022 crypto cycle. For this reason, day to day crypto traders are focusing on what the U.S. Federal Reserve plans to do with its interest rates and availability of dollars. 

To find a bottom, there are two liquidity related factors to look out for. First, market expectations that central banks will continue to tighten the money supply, turn into expectations that central banks will resume monetary expansion. Second, crypto companies increase appetite to build crypto leverage again. Both of these would increase liquidity and drive a new cycle of speculation. 

Which brings us back to the question about the bottom of the crypto cycle that almost everyone is asking: are we there yet? To answer that question, look at bitcoin creation, past cycles and above all, liquidity. 

Thanks for listening. If you enjoyed Thoughts on the Market, share this and other episodes with a friend or colleague today.