Institutional investors have experience their first dose of how volatile a free market is. The trading of cryptocurrencies happen 24 hours a day, 7 days a week, across the globe. Even in the early days of crypto, trading use to take place in a barter like system typically off exchanges. Unlike typical currency trading through FOREX exchanges, which is controlled by a few players, crypto trading is to a certain degree decentralize. This allows crypto to be bought and sold by just about anyone from anywhere in the world. The first time bitcoin broke the $1000 threshold was during the Greece EU crisis. In a sign of confidence, Europeans invested heavily into Bitcoin and Litecoin believing that the European crisis was about to split the EU apart.
In a free market, value is derived strictly from supply demand economics. In 2017, retail investors, losing confidence in their local economies, invested heavily in crypto as an alternative asset. Seeking Alpha, they took a leap of faith by investing in crypto driven by mainly by financial professionals, millennials and zoomers. In 2020, institutional investors, facing the same conundrum, pushed for regulatory approval to get involved in Bitcoin.
The flow of money from institutional investors led to Bitcoin reaching a high of $40600. Once sufficient funds have been fully invested, prices started to normalize as investors typically sell their volatile assets when it drops. This happens due to stop limits set when the price of the asset drops below a certain threshold. Institutional investors are typically risk averse and funds which do not hedge are typically force to sell when liquidation events happen.
Similar to what happened in 2013 and 2017, Bitcoin will fall in price as the flow of money reduces. Because crypto markets are free markets, the business cycle tends to happen at an accelerated pace. In a normal economy, government led by their central banks tries to cushion the effects of the cycle by controlling the curve above. In a total free market, there are no regulatory authority to cushion the cycle, hence the velocity at which change happens is more evident.
Institutional investors might have a hard time reconciling with this fact as in most cases they typically have a central authority to look at for guidance. In a total free market, the decentralize nature of value and its derivation from supply-demand economics, make its hard for anyone to actually gauge what future might hold. Halving is a process in bitcoin when the generation of new Bitcoins as rewards are reduce by a factor of 0.5. This contracts supply causing the price to naturally gravitate upwards. Secondary factor is liquidity. Bitcoin is still highly liquid as the number of holders of Bitcoin far outstrips any other assets classes.
So whats next for crypto industry?
Countries are already looking and considering various methods of digitizing their currencies. Now creating their own digital currency against the US Dollar might be a natural course of action but given the liquidity of the core cryptos, Bitcoin and Ethereum, having liquidity and confidence similar to the US Dollar. There is a possibility that countries might soon be buyers of Bitcoin.