Originally published on November 28, 2018
The crypto market correction turned winter will soon mark its first year. Over the last months, many folks have posted tables of previous BTC corrections ranging from 30–90% with the logic that we’ve been there and have always recovered.
True, BTC has endured multiple 80%+ corrections and recovered massively after that, which is impressive. There is a good chance it will do the same this time as well.
But. It gets harder and harder with every new correction.
I want to draw attention to the factor which is usually omitted from the correction tables — volume, i.e. how much money was traded just to get back to the pre-correction high. The below data comes from coinmarketcap for simplicity. It excludes OTC volumes, which may be as large. For the sake of simplicity (and lack of complete data), I will ignore OTC here.
Suddenly, the 2013–2015 correction, while very similar in % decline terms, pales in $ volume terms compared to the current one. The current difference is over 200x.
To estimate the volume needed to reach the previous high, and, assuming the low was on the 26 Nov, I took a factor similar to the corrections in 2017–1.4x. I seems a decent assumption, if not a bit conservative. It could be anywhere between 1–4x. The 2013–2015 bear market needed 4x the volume to get back to the previous high, a) because it took more than a year, b) there were a lot less people in crypto and c) less capital back then. Below is a sensitivity table of the volumes needed depending on the factor (the numbers are in trillions) — the one in the table above is $3.2trn.
However, volume is not a very good indicator. We need some measure of the fresh fiat that is needed to fuel a recovery. One way would be to come up with a fiat-volume velocity, i.e. how many times does every new $ get traded. We have bots, wash trading and what have you that obscure the picture. Let’s take a factor of 50–100x. I don’t know if that is adequate, high or low. If anyone has better data, please let me know.
If we take 100x, that means that anywhere between $20bn–$90bn of new money will be needed just to get back to the 20k high.
I wanted to cross-check with another method, which was described by Chris Burniske here and here and based on the fiat amplifier vis-a-vis market cap change. In his analysis, he tried to guesstimate the effect on the market cap of $1 in or out of the market based on the taxes people had to pay back in April. He came up with a factor range between 2–25x, with another citation that goes up to 50x. So who knows…
To get back to the previous high, BTC needs to regain ca. $285bn in market cap. Using a broad range for the amplifier, anywhere from $6bn-$140bn of fresh fiat will be required.
All in all, it seems we need anywhere between $10bn–$100bn if we look at the two methods above.
Where would the money come from?
On one hand, there are funds in the hands of existing investors who sold higher and can buy lower. But given how many retail investors lost money, I would doubt they will put a lot of new cash in crypto anytime soon.
That leaves institutions. First thing to note is that not all funds can invest in crypto for various reasons —focus on different asset classes, mandate, regulation, custody, other restrictions, pure neglect etc.
Let’s assume $50bn of cash is needed. Assuming investors (who can and want to invest) allocate 1% of assets to crypto, we need global funds with AuM of $5trn to enter.
No problem. Global funds AuM are in the range of $80trn.
However, this is misleading. We have to take out the ones which can’t or won’t buy crypto like fund of funds, private equity, venture capital, pure fixed income, pure equity etc. That is a big chunk.
So who is left? Alternative investors — let’s look at non-crypto hedge funds. There are currently ca. $3trn in AuM globally. Of these, many strategies don’t have anything to do with BTC and they have no reason to buy.
Potential candidates are macro funds, CTAs, alternative strategies and multi strategy funds which have a combined $600bn AuM. Separately, commodity assets held by all HFs in 2017 were $300bn — ca. 10% of AuM. BTC could initially fall in this bucket.
To enable these investors to enter the market properly, we need the custody (getting there), exchanges and OTC desks (getting there) and yes, ETFs (still hoping).
We can also count on family offices and HNW individuals to enter, but they also need the proper infrastructure. As a side note, it will be interesting to see if, in the next bull market, retail will be the last cohort to enter, typically the normal course of business.
Could these investors put $50bn in the market. Maybe. But it may not be enough though to go to a new high.
The good thing with BTC is that is has other use cases. The above analysis concerns the “investment” use case. However, we have the “store of value” use case which would bring other types of buyers to the market — central banks and common savers. This is where BTC has to take market share from gold. In addition, if the use case of “replacing offshore money” starts getting traction, this will unleash corporate cashflows in the hundreds of billions. Plus, the “payment” use case via Lightning and similar channels.
For these additional use cases, in addition to custody and exchanges, we need the wallets, merchant tools and lending infrastructure, all of which are being developed at the moment.
All in all, to get to a new high, an order of magnitude higher than the 20k all time high, it seems we need several BTCs use cases to become a reality.
Finally, the numbers above are only about BTC. It is still the only cryptoasset which has successfully recovered from multiple severe corrections. All others are being put to the test for the first time. Some will surely make it, many won’t.
So keep in mind that assuming BTC keeps 50% dominance, we would need fiat worth 2x that of BTC inflows in order to reach the all time high in total crypto market cap of $800bn.