Cryptocurrencies are here to stay, and so is Mode Global Holdings
“…Mode’s payroll offering allows interested employees the option to invest in the crypto asset on a monthly basis, which means they can ride the monthly fluctuations in price and invest steadily in the world’s most popular digital asset….”
It has been another ‘interesting’ year for bitcoin holders so far, as the coin has tumbled – again – from the record highs it hit in November. It might seem that the cycle of boom and bust is repeating itself.
But something important has changed. Cryptocurrencies no longer operate entirely in their own alternative financial universe: they are now established as part of the mainstream investment landscape. What difference does this make, and does it help us discern some kind of pattern in the price of bitcoin and its peers, in the same way as long observance has allowed analysts to discern likely shifts in the price of gold and commodities, and ebbs and flows between value and growth equities?
Crypto comes in from the cold
Though digital currencies have repeatedly surged over the past two years it has, as ever, been a wild ride. When we last looked in detail at digital currencies, just over a year ago, bitcoin was soaring, trading between $50,000 and $60,000. No-one was surprised when it came crashing back down to earth again in early summer, the talismanic Elon Musk announced that Tesla would no longer accept bitcoin as payment because of its carbon footprint, and China tightening restrictions, banning financial institutions and payment companies from providing cryptocurrency services. But by the autumn bitcoin was bubbling up again, rising to new heights before this year’s plunge.
The crypto’s endemic volatility, however, didn’t stop more than a million UK investors taking or increasing their holdings during the pandemic. Much of the interest, of course, was short-term, opportunistic, or both. Financial Times commentator Claer Barrett observes that for many cash-strapped younger stockpickers bitcoin offers the tantalising prospect of generating significant returns much more quickly than conventional investment. As she notes: ‘Crypto, peer-to-peer and using trading apps and spread betting platforms to make short-term punts on stocks and foreign exchange are closer to gambling than investing – but given the pedestrian returns elsewhere, young people are tempted to take an “all or nothing” approach.’
But, amidst the now customary stories of bitcoin’s sudden surges and reverses, something new has been happening, as corporate and institutional investors have quietly accumulated stakes in the cryptocurrency market. Things started to shift in 2020 when PayPal recognised bitcoin it as a legitimate currency for use through the 26 million merchants on its network. And last year crypto started to become integrated into the everyday financial world, with hedge funds and high-frequency traders taking major positions, and banks beginning to offer services such as digital asset lending and custody. By the autumn the first US bitcoin ETF – the ProShares Bitcoin Strategy – had been launched, debuting as the second-most heavily traded new ETF on record.
Established investors are now pouring money into even the most curious crypto products, such as non-fungible tokens (NFTs): images, videos and music given certificates of ownership and stored on the blockchain, that can exchange for millions of dollars, and that now constitute a global market worth some $40bn. According to reports earlier this month venture capitalists Andreessen Horowitz are to offer $4bn to $5bn to finance Yuga Labs, the start-up behind the Bored Ape Yacht Club NFT collection – led by pseudonymous founders ‘Gordon Goner, Emperor Tomato Ketchup, No Sass and Gargamel’ – which counts celebrities such as Gwyneth Paltrow and Snoop Dogg as owners.
Indeed, the gradual embedding of cryptocurrencies into the wider financial world seems to go some way towards explaining the nature of bitcoin’s latest collapse. The stats are as grisly for holders as ever. This year Bitcoin is more or less flat at around $40,000, down more than 40pc from the all-time high of $67,734 it reached in November 2021. Another digital coin, Ethereum, is down 38.5pc from November high of $4,799. Money was withdrawn at record rates from crypto products last month, investors pulling an average of $61m from digital asset vehicles each week in January, the fastest rate of withdrawals for at least a year. The discount between the share price of the Grayscale Bitcoin Trust – which gives investors exposure to crypto assets without holding the tokens directly – and the value of the assets it holds is now a record minus 25pc. Robinhood’s crypto trading revenue has plunged 79pc from its quarterly high in mid-2021.
But there is increasing evidence that bitcoin and other digital currencies are now moving in relation to the wider market, rather than simply according to variables within their own ecosystem. Last month they fell in line with speculative and higher risk assets such as tech growth stocks, which investors have been unloading in anticipation of interest rate rises and as the everyday post-pandemic economy, a landscape friendlier to value stocks, has continued to re-emerge.
Bitcoin has lately often moved in near lock-step with Nasdaq 100 futures (derivatives that reflect sentiment towards US tech giants). At the time of writing the tech-heavy Nasdaq 100 index is down around 11pc so far this year, and a basket of unprofitable speculative tech stocks is down 23pc: Bitcoin has fallen by 18pc. Indeed analysis by Goldman Sachs analysis suggests that bitcoin has increasingly close correlations with assets that exert influence across other global markets, such as crude oil and government bonds. The coin is still subject to the idiosyncratic influences of the digital asset market, such as the hashrate (the rate at which new units of the currency are mined), the amount of dollars miners hold in reserves, the influence of bitcoin ‘whales’ (the handful of investors with very large holdings), and shifts in financial rules (notably the tightening of Chinese regulations last May mentioned above). But there are clear signs it has been drawn into the orbit of the wider financial market. In brief, bitcoin seems to be emerging as ‘an asset that investors buy when investors are taking an optimistic view of the economy or sell when they are nervous’.
Cryptocurrency beyond bitcoin
By this logic, then, bitcoin investors should keep their powder dry until the current rotation to value is over and tech stocks recover. The picture is, to say the least, unclear, but that could happen sooner rather than later. Yes, there has been a strong move from growth to value funds so far this year, which outperformed the S&P 500 by 70pc last month. In the first week of the year value equities outpaced growth – on a 50-day basis – by the second-widest margin since the early 2000s dot-com bubble.
But look closer and it becomes apparent that while speculative tech has plunged, big tech has been relatively unscathed. Sure enough, $220bn was knocked off the value of Meta a few days ago when the company warned that Facebook was losing market share to newer rivals like TikTok. But elsewhere Microsoft is up 6.8pc compared with August last year, Alphabet by 6.0pc and Apple by 17.3pc. Some analysts believe the value rally hasn’t much further to go: growth equities that have taken a hammering are beginning to look undervalued, a shift in market climate that might pave the way for a crypto resurgence.
In a subtle Bloomberg article financial historian Niall Ferguson considering the longer prospects for digital money notes that the all-embracing term ‘cryptocurrency’ tends to occlude the vital distinction between bitcoin, a speculative asset, and decentralised finance (DeFi), a new framework for financial transactions. Investing in one is not the same as investing in the other.
For Ferguson bitcoin’s volatility is diminishing as it has become enmeshed within the wider market. He thinks it unlikely it will crash again, as it did during its first bubble, from November to 2013 to January 2015, when it fell by 84pc, and the second, from December 2017 to December 2018, when it dropped by 83pc. If this pattern were to reassert itself the price would fall to a low of $11,515 by this November, 83pc below its most recent peak. Now, however, bitcoin is a much larger asset than before. And institutional adoption has introduced some stability. Pension funds have become limited partners in crypto hedge and venture funds, taking long-term stakes.
Ferguson believes bitcoin is now settling into a longer term role as an inflation-hedging asset, whose fortunes are tied to interest rates. The coin’s value to investors consists in its limited supply, guaranteed by the protocol restricting its supply to 21 million bitcoins. He suggests that bitcoin is playing something like the role gold played as a hedge against inflation in the 1970s. The price of the yellow metal surged tenfold through the decade to 1980, before tighter monetary policy during the 1980s forced its value back down as inflation fell. Now that central banks are sounding a more hawkish note, signalling higher interest rates and quantitative tightening, bitcoin’s value as ‘digital gold’ may be subdued for some time to come.
But Ferguson notes the cryptocurrency investment opportunity goes beyond bitcoin, which is just the prominent manifestation of an elegant blueprint for a self-regulating digital mode of exchange, allowing individuals to conduct exchanges and enforce ‘smart contracts’ without financial or legal intermediaries. DeFi opens the prospect of replacing some parts of the the world’s financial machinery with digital technologies facilitating seamless transactions. Thus far other crypto assets, even more substantial offerings like Ethereum, have been treated like speculative assets along with bitcoin. But Ferguson believes that ‘just as the skeptics missed the beginnings of Big Tech in the wake of the dot-com bust, so today’s crypto haters are missing the beginnings of a major disruption of the financial system in the form of DeFi.’
He argues ‘existing global and national financial systems really are ripe for disruption’, allowing ‘intermediaries such as banks, credit card companies and money-transfer companies [to] collect sometimes extortionate fees from both consumers and merchants’, and levy ‘usurious interest rates on credit card debt or … overdraft charges slapped on by banks’. Whatever one’s personal view, the fact is DeFi now appeals to a sufficient contingent of the financial world to make some re-engineering likely. Ferguson draws on his knowledge of financial history to put DeFi’s emergence in historical context as the latest manifestation of money’s continual evolution. He points to an interesting precedent in the late middle ages, when bills of exchange emerged to allow merchants to conduct trade over land or sea through a simple piece of paper which extended credit from one merchant to another, an IOU requiring no third-party verification that constituted a form of peer-to-peer credit that proved crucial to the flourishing of European commerce. ‘Applying financial history to the future,’ he writes, ‘I expect this crypto winter soon to pass. It will be followed by a spring in which Bitcoin continues its steady advance toward being not just a volatile option on digital gold, but dependable digital gold itself; and DeFi defies the skeptics to unleash a financial revolution as transformative as the e-commerce revolution of Web 2.0.’
Financial Times writer Robert Armstong follows Ferguson part-way, observing that ‘ebbing retail interest and falling prices have not deterred VCs, who smell huge profits if crypto becomes critical financial infrastructure’. Noisy advocates for a ‘crypto revolution’ or those who dismiss it as a passing infatuation can’t see what appears to be happening before their eyes: ‘The middle range is neglected. What if crypto just turns out to be a medium-sized technical innovation that improves the delivery of certain services?’
Discerning the way ahead
As always with cryptocurrencies, the road ahead is foggy. One thing for sure is that bitcoin is still volatile. Many investors will want to stay away altogether. Those who take a stake should ensure their holding is part of an appropriately diversified portfolio. But what does seem to becoming clearer is that crypto is not going away. There are some emerging themes: Institutional investors are taking larger, longer term holdings. Bitcoin seems to be establishing itself as an inflation-hedging asset. And decentralised finance, in some form, and to some extent, seems likely to become a permanent part of the world’s financial infrastructure. In the shorter term the fortunes of bitcoin seem to be related to growth stocks: if they go up, it seems bitcoin will follow.
Those interested in taking a stake have a few options. There are a few well established funds, such as the $8bn Grayscale Bitcoin Trust (GBTC) in the US, and the WisdomTree Bitcoin (BTCW), a physically backed Exchange Traded Product (ETP) designed to offer shareholders a simple, secure and cost-efficient way to gain exposure to Bitcoin’s price. There are also a growing range of ETFs, including the Valkyrie Bitcoin Strategy ETF (BTF) and VanEck Bitcoin Strategy ETF (XBTF) in addition to the ProShares Bitcoin Strategy ETF (BITO) discussed above.
There is also the option, of course, of buying bitcoins directly through a credible digital currency exchange like Coinbase, which has been licensed by the UK’s Financial Conduct Authority. Buyers simply create an account, enter a payment method, and after proving their identity with a driver’s licence or passport, can start adding the currency to a personal ‘Bitcoin wallet’.
Another option is Mode Global Holdings. Mode was created with a vision: to help accelerate the world’s transition to a digital financial system combining the best of payments, investment, loyalty, and digital assets. Mode’s aim is to build a next-generation ecosystem that transforms the way in which consumers and businesses transact, leveraging the power of Open Banking, and giving digital assets the place they deserve in today’s modern economy.
Boasting over 200 years of combined experience, the directors and executive team at Mode have led highly-reputable careers in financial services and technology in the UK and Europe. With such unrivalled expertise, their goal is to become a regulated financial services offering payments and digital asset services for both consumers and businesses in the UK.
In addition to boosting access to a variety of digital assets, Mode also plan to unleash the potential of Open Banking, a revolutionary technology that they believe will allow them to build a new payments ecosystem that serves businesses and customers better, and transforms the way that people manage their finances.
It’s not easy to decide how much digital currency to hold, or impossible to say just where prices are going to go next. But it seems that would-be investors now have more options than simply trying to ride bitcoin’s next surge: cryptocurrencies seem here to stay, offering opportunities for the patient stakeholder willing to back the emergence of an increasingly established financial technology.
