Motus Missives – Vol. 11 | Beneath the Surface
Right now crypto is unpopular. Bitcoin’s ~80% YTD rally is unloved and under-owned, and new acquaintances seem concerned when we tell them we run a crypto fund. But depending on who you ask, sentiment among market participants varies widely. Beneath the surface of public opinion, a very interesting dynamic of investor flows is building. Here we examine the roles and positioning of different crypto investor cohorts and how they will contribute to markets in coming months.
Like all asset classes, crypto is influenced by macro data. However, with the exception of last year, it historically has been uncorrelated with other assets. This is because as a small and nascent asset class, macro effects get overwhelmed by flows resulting from adoption and speculation. When flows are active, they will overwhelm macro effects, and when they aren’t, macro will drive prices.
With most investors having capitulated last year and only longtime crypto natives remaining invested, flows were quiet, and macro dominated. We described that setup as presenting an asymmetry to the upside, because while macro can always be a headwind, the potential for inflows versus outflows was quite favorable.
The current market and outlook for flows can be explained in terms of the positioning of three investor cohorts: Retail Investors, Traditional Institutional Investors, and “Crypto Native Investors”, which we loosely define as individuals and entities who have already held crypto for years.
To summarize the current state of each group:
Retail is stung and on the sidelines—this reduces liquidity and dampens volatility. It is a large potential source of new fast money but unlikely to lead inflows.
Traditional Institutions haven’t yet participated—this hasn’t had an impact on liquidity or volatility yet. It is a large but slow-moving potential source of inflows, which looks to arrive soon.
Crypto Natives are steadily in accumulation mode—this saps liquidity from markets and has supported prices YTD. It is a large source of slow-moving flows in either direction, typically selling/providing liquidity for new retail buyers during bull runs.
The resultant setup for BTC is one of low liquidity, low available supply, high potential for near-term Institutional inflows, and modest potential for a subsequent return of Retail. When those inflows happen, what generally follows is rotation away from bitcoin by Crypto Natives, which provides liquidity to Retail, and which supports prices for the broader crypto universe.
Looking more closely at each cohort:
The bear market flushed out many retail participants. Google searches for Bitcoin tells this story well, with interest troughing despite price up over 80% YTD.
According to a Q1 Pew survey, 75% of Americans who have heard of crypto are not confident in its safety. Among the 17% of Americans who have owned crypto at some point, many have thrown in the towel: 31% have now sold all of their holdings.
Traditional Institutional Investors
After years of exuberance within the crypto community—"The institutions are coming!”—it appears they’re finally about to arrive. TrackInsight, along with JP Morgan and State Street, surveyed 550 professional investors in Q2 and found that while 76% have no crypto exposure, about 50% would consider it via exchange-traded products.
This explains the rush to file/re-file BTC ETFs by several of the world’s largest asset managers.
Crypto Native Investors
On-chain data shows that long term holders have continued to accrue BTC, with what we call Long-Term Holder Supply (coins that haven’t moved for at least 155 days) reaching an all-time high.
Increases in the price of BTC that are related to new retail adoption are typically visible in on-chain data by observing an increase in the proportion of short-term holder supply. Note the expansion of the rust-colored channel below during up markets. Interestingly, that has not occurred in 2023. Instead, we see an expansion of long-term holder ownership (in light blue). The rally this year has been driven by accumulation of tokens by long-term holders rather than new retail inflows.
Crypto has been under regulatory assault in 2023 (at least in the US) and faced a challenging macro backdrop. Despite that, and absent inflows from either Retail or Institutions, BTC is up over 80% YTD. Incremental buying from long-term holders alone hasn’t typically moved price to this degree, but price action has been amplified by low liquidity and tight supply. Exchange balances, for example, are at 5-year lows.
Crypto is the noisiest asset class in the world, and there is no shortage of negative headlines about lawsuits, regulation, fraud, etc. Yet beneath the surface, the largest potential buyers of crypto have indicated their desire to allocate to ETFs, and those ETFs are right around the corner. Combine that with tinderbox liquidity/supply dynamics, and the setup for BTC remains very asymmetrically favorable despite strong YTD performance.
For context, the black line below compares BTC performance since cycle low to previous cycles.
The inflow effect never stops with just bitcoin—that is simply the current path of least resistance for adoption. Historically, BTC flows ultimately spread out in to the broader ecosystem to tokens/platforms with novel innovations and value accrual. History suggests that will repeat.
Bitcoin Dominance is a measure of BTC’s market cap as a percent of total crypto market cap. It is currently at the highest level since April 2021. Typically BTC leads crypto out of bear markets, and then the rotation occurs. See below for a summary of Dominance through prior cycles.
There are many voices with strong negative opinions about crypto right now, but those voices don’t necessarily represent selling pressure. The market participants who will drive flows are decidedly bullish, as has been reflected in prices this year. We are watching for the institutions to finally arrive, and for the rotation into broader crypto that will follow.
As always, we welcome feedback and questions.
Past performance is not indicative of future results. This communication does not constitute an offer to sell or solicitation of an offer to buy the Interests in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation in such jurisdiction. This communication is being provided solely as a high-level overview and is not intended to be relied on for the terms of any offering. Motus Capital Management has or may hold a financial interest in the assets mentioned. Full disclosures can be found here.