The common digital assets bear market theses don’t have “a lot of substance” and are “most likely inaccurate,” according to Jeff Dorman, the Chief Investment Officer (CIO) of US-based investment management firm Arca.
While many seem convinced that we are now in a bear market, given the drop in prices, as well as in sentiment – “here’s the problem – we can’t come up with a single reason that validates why the market is all of a sudden so convinced that digital assets are going into an extended funk,” Dorman wrote in a blog post.
“While many are calling for a bear market — the data simply suggests otherwise. Whether or not this is enough to attract new buyers remains to be seen,” he added.
Gathering the opinions of industry leaders, funds, and traders about the specific bear thesis that makes traders convinced of the upcoming price declines, Arca listed the ten most popular bear cases, along with the reason why it might be incorrect.
1. “China intends on killing digital assets”
The CIO argues that China’s most recent crackdown is focused exclusively on Bitcoin (BTC) miners and digital asset exchanges that offer leverage, and not the actual underlying assets themselves.
Therefore, per Dorman, “it’s difficult to believe that this entire global asset class is at the mercy of a single government interjection. In fact, most market participants agree that long-term results from China’s potential exodus are actually positive, from a redistribution of hash power globally to more [environmental, social, and governance] ESG-friendly mining facilities.”
“Well, we’re 6 weeks into this selloff and most assets are already down 40%-70%. It would be reasonable to argue that we have already bottomed,” said Dorman.
2. “Massive regulatory pressure from the US”
Even if this one were true, said Dorman, “it would be a net positive in the long-run.” While markets may react “violently” when a regulator “opens their mouth,” laws have to change and be enacted before any governing body has jurisdiction to regulate this asset class – and this takes years to happen. (Learn more: ‘Knives Coming Out’ As Cryptoverse Responds To BTC FUD By US Senator)
3. “The Fed will be tapering soon and that is bad for risk assets”
“Stop. Tapering is not happening anytime soon, the [US] 10 year [treasury] is still at 1.5%, the US dollar is at a six-year low, the VIX is back to pre-COVID lows, tech stocks are booming again… it’s safe to say this is overblown.” Besides, even if true, it would mean that the digital assets market is the only asset class affected by it and the only one affirming the Federal Reserve (Fed) tapering view.
4. “Retail momentum and interest is dead”
“Off the highs… sure.
Dead and never coming back? Not. Even. Close.”
To back this statement, Dorman provided charts of BTC, Ethereum (ETH), and other projects’ tweet volume, Google search volumes, weekly Twitter followers of crypto exchanges, weekly crypto subreddits’ subscribers, and weekly YouTube views of influencer videos – all showing either a new all-time high reached recently, followed by a smaller drop, or the levels being below the all-time high gained in earlier years, but still notably high.
5. “Lack of institutional interest”
Arca speaks to institutional investors daily, said Dorman, noting that these investors are “still allocating to funds, in record sizes.” For example, Goldman Sachs and Citi launched digital asset divisions due to client demand, while a16 raised USD 2.2bn fund dedicated to digital assets. “For the first time on record, junk bonds yield less than inflation… tell me again where you think money will be flowing if not into new asset classes like digital assets?” wrote Dorman.
6. “ESG concerns”
The ESG (Environmental, Social, and Corporate Governance) concerns are entirely specific to Bitcoin, and not at all relevant to most other digital assets, argued Dorman, while – as noted previously – the redistribution of hash power out of China to more clean energy sources across the world will be a net benefit for the environmental concerns.
7. “Tether, Celsius, BlockFi, Binance risk”
There are numerous conspiracy theories about these four companies, but none of those are news and “therefore cannot be used as a valid excuse for the current market correction, and any “what ifs” surrounding them and potential regulatory issues are “lazy excuses” as well.
Per Arca, only Tether poses systemic risks, since USDT is intertwined with the working capital of all exchanges and decentralized finance (DeFi), “but even that would quickly be replaced by other perfectly comparable stablecoins should a problem actually arise,” said Dorman. Among the top 15 digital assets by market capitalization, three of them are stablecoins. (Learn more: Imagine Regulators Shutting Tether Down – What Happens to Bitcoin?)
8. “MicroStrategy is going to be a forced seller of Bitcoin”
“This is the dumbest of all fears as it is 100% not accurate and can be easily disproved by looking at the bond covenants. Any fears of MSTR being a forced seller of BTC, or being “liquidated” is a complete farce and a misunderstanding of how bond covenants work,” the CIO stressed. (Learn more: MicroStrategy Has No Limits For Bitcoin Purchases, Discusses Sale Scenarios)
9. “Digital assets are reflexive and fundamentals are deteriorating as price declines”
Even though this one is likely the most important of all of the bear cases, “it’s just not true,” Dorman said. Firstly, BTC and other cryptos have no fundamentals. Secondly, everywhere else, including DeFi, gaming, Web 3.0, and “other pockets of digital assets with real users, cash flows and adoption metrics, the fundamentals have never been stronger.”
10. “Grayscale (GBTC) unlocks are going to crush the market”
According to Dorman, this is “Nope.” A buyer of GBTC shares is subject to a six-month lockup, and while the biggest unlocks are happening over the next two months, which could lead to heavy selling of GBTC on the open market, this has no effect on BTC itself, as the trust does not trade its BTC, only the shares are being traded.
Moreover, since most buyers of GBTC were doing it for the arbitrage back when GBTC was trading at a premium to Net Asset Value (NAV), they were also shorting BTC. Therefore, there could actually be buy pressure, not sell pressure, placed on BTC, “as those who sell GBTC will have to buy back bitcoin to cover the short-leg of the trade.”
Meanwhile, in a separate Twitter thread, Lyn Alden, Founder of Lyn Alden Investment Strategy, argued that those bears who are focusing on Tether’s impact on bitcoin over the past year “would have probably done better to focus on the Grayscale neutral arbitrage trade instead.” She stated that, when new competition resulted in the market taking away GBTC’s premium to net asset value, the biggest bitcoin buyer stopped buying.
“In other words, part of the run-up in the second half of 2020 was due to the Grayscale neutral arbitrage trade, sucking in a ton of bitcoin,” she said. “When ETFs [exchange-traded funds] and other new ways to access bitcoin made GBTC less unique, the premium went away, so the neutral [arbitrage] trade went away.”
At 14:25 UTC, BTC is trading at USD 36,242, having increased 5% in a day and 14% in a week. Ethereum is also up 9% in a day and almost 17% in a week, changing hands at USD 2,216. The top 100 coins by market capitalization are nearly entirely green in both time frames.
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