Risks remain, but the worst of the crypto winter has passed - Ben McMillan
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(Kitco News) - The cryptocurrency market has gotten off to a hot start in 2023. Bitcoin (BTC) saw its price increase by more than 41% in January, its best start to the year since 2013, while the altcoin market has come alive with tokens like SingularityNet (AGIX) seeing gains in excess of 800%.
The rapid turnaround in prices has delighted crypto traders who just experienced the worst crypto winter in the history of the market, but many remain hesitant to jump back into their favorite cryptos for fear of a bear market revival.
These fears are justified, according to Ben McMillan, Co-Founder and CIO of IDX Digital Assets, who noted during a conversation with Kitco Crypto that there are multiple systemic risks that remain a threat in the near term as the crypto market looks to get firmly on the road to recovery.
One such risk is the ongoing saga with Digital Currency Group (DCG) and its embattled lending company Genesis, which filed for bankruptcy in January owing its creditors more than $3.6 billion.
“DCG certainly still represents a risk, although now that Genesis has filed for bankruptcy, the hope is that investors will start to have some clarity around the size and scope of the fallout,” McMillan said. “2022 was a very real barrage of systemic risks within the crypto ecosystem and a lot of bad news was priced in which, I think, contributed to the rapid bid up in prices that we've seen this year.”
On Monday, CoinDesk reported that DCG and Genesis reached an in-principle agreement on terms of a restructuring plan with a group of the firm’s main creditors which will help begin the process of resolving some of the major issues that led to Genesis filing for bankruptcy. Included in the agreement is a plan to wind down the Genesis loan book and to sell off entities belonging to the bankrupt lender.
Developments like this one, along with the performance of the crypto market in January, suggest that “the worst of the crypto winter is behind us,” according to McMillan, “but that doesn’t mean the volatility is,” he warned. “While FTX will probably go down as the ‘Lehman’ moment in crypto, DCG still definitely presents a risk, as does the possibility of increased regulatory actions, not to mention a potentially more hawkish Fed posture, so even if the low is behind us that doesn't mean it's a smooth ride from here.”
When it comes to who has been driving the rally thus far, McMillan pointed to retail traders, who have been actively buying.
“We have seen inflows into our crypto related products but it's primarily been from retail-facing RIAs [registered investment advisors] as opposed to institutions. The institutions are asking a lot of questions and showing interest but the actual flows have been RIAs,” McMillan said.
When asked what it will take to really get the market moving and propel Bitcoin to new highs, the investment advisor pointed to the need for clear regulations to enable larger institutions to get involved in the space. “I think for Bitcoin to see new highs, that requires institutional buy-in and that can't happen until there's more clarity on the regulatory side,” he said.
The most important thing to keep an eye on this year, according to McMillan, is “the delta between what the Fed is messaging and what the markets are pricing in as it relates to the path of rate cuts.”
“I think QE at some point down the road is more likely than not but that doesn't mean it's this year (or even next). Inflation is clearly moderating now but longer term it is going to be tough for the Fed to keep it under 2%,” McMillan suggested. “We also think the Fed will revise its target inflation rate higher in the next 3 years. For these reasons, most of the flows we've seen this year have been into our Long/Short Commodities Fund (COIDX).”
As for what developments are in store for the crypto industry, McMillan noted that “there’s definitely a renewed vigor behind regulation, which isn't bad per se, but could keep some of the big investors on the sidelines for a while.”
The CIO went on to highlight Web3 as a growing mainstream trend, including the integration of NFTs as a way to offer membership rewards for some brands, which Starbucks has implemented. “I think that will be a powerful trend that continues and is very bullish for crypto long-term,” McMillan said.
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Bitcoin outlook for 2023
When asked about the outlook for Bitcoin in the near future and whether the majority of traders are back in the market, McMillan noted that while there has clearly been capital flowing into Bitcoin, as reflected in the price increase, but so far it's mostly limited to retail traders while larger institutions remain on the sidelines.
“Most (but not all) of the larger institutional investors we talk to are still waiting on the sidelines for the time being,” he said. “That sentiment seems to be less bitcoin-specific and more a general shift away from high-risk asset classes.”
When it comes to forecasting where Bitcoin is headed, McMillan said that the only safe prediction to make for Bitcoin at this point is “the level of volatility.”
“That said, I wouldn't be surprised to see bitcoin north of $30k in June and north of $40k by year-end...but as a quant, I'm obligated to note that the confidence interval around those "predictions" is very wide,” he warned. “Where I'm much more confident is in the fact that we'll continue to see high volatility this year.”
In closing, McMillan suggested that “an active risk-managed approach to bitcoin is really the best option for most investors in the space,” adding, “It's an exciting asset class that is clearly here to stay, but 50%+ drawdowns are the norm and to ignore that is dangerous.”