Bitcoin’s backers shaken, not deterred, by virus-fuelled price swings

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Welcome to The Fintech Files, your weekly roundup from FN’s fintech correspondent Ryan Weeks, keeping you up-to-date with the latest developments in financial tech and innovation.

After seeing the price of bitcoin slashed by 40% in a single day of coronavirus-fuelled volatility on 12 March, one might expect the financial institutions building infrastructure in the nascent asset class to be a bit shaken.

Instead, they appear more committed to the volatile cryptocurrency than ever before.

Chris Tyrer, head of Fidelity’s digital assets operation in Europe, which sells custody and trading tools to institutions, told Fintech Files: “Did we see a large move last week? Yes, absolutely. Did we see a large single day move? Yes, absolutely. Does that completely discount the narrative that bitcoin will one day be used as an institutional store of value? I don’t think so.”

Bitcoin is the original cryptocurrency. Envisaged as a global form of money freed from government intervention, it is underpinned by blockchain technology, a form of digital ledger maintained by online networks.

On 12 March, with wider markets in turmoil as the coronavirus pandemic intensified, the price of bitcoin fell sharply from just under $8,000 to a little over $4,000. Commentators have stressed that this mirrored similarly dramatic falls across both traditional and alternative asset classes.

But bitcoin – which has been hailed as a “digital gold” and a safe haven in uncertain times – was not supposed to perform this way. What happened?

“There is an old adage in the asset management industry which points out, that in a crisis, all correlations tend towards one. In a liquidity squeeze, a margin call cascade or a general flight to cash, everything is for sale, and everything liquid tends to get sold,” said Chris Bendiksen, head of research at the crypto fund manager CoinShares, in a note on 16 March.

“While many in the bitcoin industry have been hailing bitcoin as a new safe haven asset, at this point it seems clear that proponents of this status have probably gotten a bit ahead of themselves.”

But Bendiksen, Tyrer and Michel Rauchs, founder of the consultancy Paradigma, believe bitcoin could achieve safe haven status in the long run. “I don’t think it is capable of acting as a safe haven yet because of its small size,” said Rauchs. With its price having recovered to around $6,500 since the crash earlier this month, Bitcoin currently has a market capitalisation of around $120bn.

David Mercer, chief executive of LMAX Exchange, has gone so far as to call this recovery “remarkable”. He said the only other asset class capable of withstanding so many setbacks is oil.

“Oil traditionally bounces back, but why does it bounce back? It bounces back because of intervention and, dare I say it, the oil cartel. Bitcoin doesn’t have anything like that and yet it keeps rebounding,” he said.

LMAX runs a digital assets exchange for institutions – primarily hedge funds and proprietary traders – which saw a spike in activity on 12 March, equating to $753m in daily trading volume.

Sudden and severe fluctuations in value remain a clear risk for bitcoin investors, but the cryptocurrency’s price range in these highly volatile times does appear to have narrowed considerably compared with its spectacular period of boom and bust in the twelve months to December 2018, when it fell from almost $20,000 to around $3,000.

It is perhaps for that reason that the asset class’s institutional adopters appear shaken, not deterred.

The Japanese investment bank Nomura, which is actively involved in a cryptocurrency custody product, told Fintech Files it remains committed to its digital assets projects.

Fidelity’s Tyrer said: “Rome was not built in a day. People have been building on this technology for the past ten years and will continue to do so.”

He added: “I haven’t had a single conversation to date with a client that has said ‘we were looking at this, we’re going to shelve this for the time being now’.”

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Get in touchDrop me a note at ryan.weeks@dowjones.com or find me on Twitter or LinkedIn. Got any news tips or feedback (good or bad)? You can also contact the FN news desk via news@efinancialnews.com

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Further reading:

Bankers, venture capitalists and founders have warned that London’s prized fintech sector faces a fundraising freeze as investors divert resources to their existing portfolios. The drought may, however, lead to opportunities for nimble investors — but they will need to be careful not to be seen to be exploiting the coronavirus crisis.

This week’s FN profile is of Chris Concannon, the plumber-turned trading-revolutionary who is now chief operating officer of MarketAxess. He says he has every intention of continuing his electronic revolution in the bond market.

Here’s a short piece on the newly-appointed lead of Six Group’s digital asset exchange.

Bloomberg reports SoftBank is hoping to raise $10bn to support its Vision Fund portfolio companies, as they struggle to cope with the effects of the coronavirus pandemic.

AltFi reports LendInvest, the property lending fintech, has completed its second securitisation of buy-to-let mortgages. A separate AltFi report shows that the P2P lender Funding Circle’s shares have doubled in the past week, after falling to almost 20p.

Finally, Sifted reports that fintech unicorns – privately-held start-ups with valuations greater than $1bn – might see as much as $76bn wiped off their valuations thanks to market turmoil stemming from the outbreak of Covid-19. The article cites a report by Rosenblatt Securities.

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To contact the author of this story with feedback or news, email Ryan Weeks

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