Shortly after Wall Street veteran CK Zheng launched his crypto hedge fund in the summer of 2021, bitcoin soared to an all-time high price of $68,000.
The rally worried the ZX Squared Capital co-founder, who was particularly troubled by speculation that bitcoin’s price could soon soar to $100,000. “People were so bullish at the time,” he told Protocol, calling the hype that drove bitcoin’s price up “crazy.”
Bitcoin’s dramatic drop to around $19,000 amid a market-wide crypto crash, while disconcerting, made sense to Zheng — who expects his hedge fund to make a lot of money by riding the 13-year-old cryptocurrency’s wild but still generally predictable market cycles.
The crypto market has shed $2 trillion in value in this year’s crash, which has led to bankruptcies and the collapse of some tokens. But the crash has also pushed bitcoin back to center stage as crypto’s OG: the premier digital asset, which might be known as a highly volatile and risky investment, but which promises huge returns to long-term investors ready to ride the token’s wild ebbs and flows.
The crash is helping bitcoin stand out from what Alma Angotti, a partner at Guidehouse, called “junk coins.”
“There are a lot of coins out there that you could hardly figure out why they’re there,” she told Protocol. But bitcoin, she said, has “a very well-developed network and ecosystem that's very sustainable.”
“Bitcoin has been around the longest. It has the most history, and it seems the most stable, not in a price way, but in a conceptual way,” she said.
Bitcoin has bounced back from its June low and is now valued at around $23,000 as other major crypto tokens, including ether, also posted gains.
Chris Kline, co-founder and chief operating officer at Bitcoin IRA, agreed. “Bitcoin has, and will continue to hold, dominance in crypto overall because it has a longer track record with a store of value characteristics,” he told Protocol. Kline believes the mini-rally in bitcoin is being driven by retail investors who see its long-term value. In fact, there are signs that institutional investors, which were once highly skeptical of but have slowly embraced the asset over the past two years, are gearing up for the long haul as they eye more exposure to crypto, especially bitcoin.
Last week, Coinbase announced a new partnership with BlackRock to help give the world’s biggest asset manager’s clients access to bitcoin. Markus Veith, a partner at Grant Thornton, described the move as “an infrastructure step” that underlines how some financial institutions are using the market downturn as “a time to build.”
“It gives people the opportunity just to focus on building out the infrastructure,” he told Protocol. “You basically have the peace and quiet to focus on working on the strategy” to enable “more people access to bitcoin and other cryptocurrencies.”
Omid Malekan, who teaches blockchain and cryptocurrencies at Columbia Business School, said BlackRock’s move underlined the growing commitment of big financial institutions to crypto assets despite the crash. “Institutions are big and slow and once you start turning that aircraft carrier, you don't just stop and turn it around when you hit a bump,” he told Protocol.
Coinbase’s disappointing quarter results underscored the heightened institutional interest in crypto: The crypto market downturn “came fast and furious,” the company said. But, Coinbase said, it added more than 1,500 institutional customers in the second quarter, saying it has “continued to onboard some of the largest clients in the world.”
Zheng said ZX Squared Capital is focused on building out its investment portfolio, and aims to raise $200 million for the hedge fund by early next year. The hedge fund invests only in bitcoin and ether, which the fund sees as “the predominant driver in the future” based on the view that after each bear market cycle, the strong “gets stronger,” Zheng said. “After the washout in crypto today,” he added, he sees bitcoin and Ethereum getting stronger.
“Every quarter, we will make an assessment of what proportion makes sense depending on market conditions,” he said. “When market conditions change, we will change our position accordingly. The whole idea is how to reduce the risk for investors but maintain a good return.”
Some investors, though, now have more subdued expectations after last year’s rally and what turned out to be misguided excitement about bitcoin soaring to $100,000.
Michael Novogratz, CEO and founder of Galaxy Digital, told Bloomberg he’s “not seeing huge institutional flows,” adding, “But we’re not seeing anyone back away.”
Novogratz said he’d be happy if bitcoin trades “in a $20,000, $22,000 or $30,000 range for a while,” but he’s “doubtful” it would rise higher than that anytime soon.
Zheng believes bitcoin may continue falling, perhaps as low as $13,000, calling its recent gains “a bear market bounce,” and speculating that the “near-term relief rally” was triggered by “so much selling in the previous quarter.”
That view — which is shared by other investors — is based on how the cryptocurrency has performed in previous cycles, when it dropped by roughly 80% from peak to bottom before resuming its climb.
Bitcoin has been and will continue to be a volatile and risky asset, which should be just one option for any investor, Zheng said. “You don't want to put your eggs in one basket. You want to diversify. Bitcoin is one way to diversify your risk.” But with bitcoin, “you have a much higher risk-adjusted return.”
That’s what makes bitcoin attractive to some investors, Veith of Grant Thornton said. “As the old saying goes, volatility is a trader’s best friend.”
Zheng said having clearer regulations could spark a new bitcoin rally. Referring to the Celsius collapse, he added that regulation could prevent crypto companies from promising 10% to 15% returns “without really a good disclosure of risk for investors.”
Bitcoin also stands out on the regulatory front. While the debate rages over whether cryptocurrencies should be regulated as securities or classified as commodity tokens, there’s an emerging consensus among key players in the dispute that bitcoin is the latter.
In May, SEC Chair Gary Gensler strongly suggested in a House Appropriations Committee hearing that he considers bitcoin a commodity that should be regulated by the CFTC.
Senator Cynthia Lummis, who with Sen. Kirsten Gillibrand co-authored a major crypto regulation bill, told Protocol in June she thinks bitcoin and ether “are definitely commodities that will be regulated by the CFTC.” But, she also said, “there are thousands of cryptocurrencies that are securities. They just are.”
Gensler has not indicated if he thinks ether is a commodity, although that’s been the view expressed by top former SEC officials — including his predecessor, Jay Clayton.
Zheng said he sees crypto regulations as “the catalyst for the next bull market” for crypto, particularly bitcoin. With clearer rules, he said, “many people who got burned by this cycle will come back.”
Correction: This story has been updated to correct the spelling of Grant Thornton. This story was updated Aug. 10, 2022.