Monthly Market Review - January 2021

Updated: Mar 8

In this note, we will look at the power of retail and what this means for crypto.

Throughout our notes, a common theme has been the crypto community’s inherent suspicion of government (and monetary policy). This mistrust was the foundation of Bitcoin's creation.

This mistrust entered the mainstream consciousness during three events in January. Firstly, the Capitol Riots in the USA, with its extreme manifestation of populism and 'patriots' believing that the government stole a free and fair election. The invasion was inherently based on mistrust of the government, news and democratic process.

Secondly, the riot's aftermath saw the USA's president, one of the most powerful men globally, muzzled through a complete social media ban on Facebook and Twitter. Parler, the social media network of choice for the right-wing, shut down when its core service providers (AWS, Apple, and Google) made the website inoperable.

Thirdly, WallStreetBets has driven attention to the centralised and perceived unfairness of Wall Street. Although it is easier to dismiss this as a profit-driven movement (and over time it has become that) there has been a core theme of 'us' (retail investors) versus 'them' (hedge funds) and making them pay for their perceived role in the 2008 financial crisis1. The main theme is that hedge funds and financial media (CNBC) rig the financial markets and that executing a short squeeze will punish them. Retail investors even accused Robinhood of being a sellout after it restricted purchasing of the most popular shares due to legally mandated clearing liquidity requirements.

The breakdown of trust in centralised authority is a clear theme in all three of these events. The internet has enabled the mobilisation of people upset with the current system in ways we haven't seen before. The trouble is the solution to this mistrust. It doesn't appear that there is an obvious one and the distrust of anything centralised makes any quick fix harder.

For example, the aftermath of the riots shows how centralised the current social media infrastructure currently is. Should Facebook or Twitter be able to ban a sitting US president from using their platform? If so, when and who makes these rules and who enforces them? Should AWS, Apple and Google have the power to remove another platform because of its users' content? In this instance, most pundits agree that Parler's enabling of hate speech justified the banning, but the decision sets a dangerous precedent. Any future decision now risks being seen as suppressing the truth and increasing the mistrust of centralisation. Especially in an environment, where there is already mistrust of any party or process (government, media, tech platform, democratic vote) capable of making these decisions.

These questions are hard to answer because they aren't technology questions; instead, they are questions about human nature and ones that many have been wrestling with for hundreds of years.

So, what does this have to do with crypto? Well, one manifestation of a solution is to further decentralise the infrastructure, which prevents any form of banning. Decentralisation is one of many solutions, each with strengths and weaknesses. No censorship reduces mistrust in central authorities, but it also introduces moral dilemmas. Platforms should ban awful things, but where countries draw the line will vary. As some platforms build on decentralised infrastructure, we expect regulators to struggle as they consider these trade-offs. As discussed last month, digital assets will reflect regulators' actions in their price and be more volatile.

We have spoken extensively about institutional investors in the last year, but given the above, if people are increasingly mistrusting centralised authority, are more retail investors buying decentralised money? We attempt to answer this question by looking at a few metrics; firstly, the percentage of BTC held by smaller players has grown. The chart below shows how smaller accounts (< 10 BTC) control c.15% of available BTC. Addresses with less than 1 BTC now own c.5% of BTC.

The increase of interest by retail can also be confirmed by looking at google search volumes. Since December, there has been a steady increase in Google search trends.

So, it appears that over the medium term that a few factors are combining in the crypto market:

  1. The number of institutional investors keeps growing (discussed in previous notes).

  2. There is still a continual withdrawal of crypto from centralised exchanges by institutional funds and large companies (as discussed previously).

  3. There is now an increase in decentralisation and crypto by retail investors, which has only just started in earnest. This interest is still below its 2018 level.

We believe that as there is less capital on centralised exchanges and more retail traders. The market's volatility will stay elevated with bouts of extreme volatility (such as January) as the market becomes increasingly sensitive to news events.