Insight
July 6, 2021
We look back at the second quarter and the events that shaped it, as well as look forward to important events in the future.
Bitcoin had a tough second quarter, finishing the period down 40.7%. This not only makes 2Q21 one of bitcoin’s weakest performing quarters since 2011 but also its weakest second quarter ever. The second quarter has historically been a period of strong returns, with only two prior second quarters showing negative returns, reminding us that past performance is not indicative of future performance.
When contextualizing the weak performance in 2Q21, we think it is important for investors to keep in mind the recent performance of bitcoin. Even though bitcoin was down 40.7% in the quarter, it had just come off four consecutive quarters of strong performance. Given this string of winning quarters, we do not find it surprising that investors used the period to realize gains.
Despite the tough second quarter, bitcoin is still up 19.1% year-to-date, making it one of the best performing asset classes of 2021 to date. Performance is now more in line with traditional asset classes, but bitcoin still ranks #6 of all asset classes outlined below.
Bitcoin and the ecosystem had several positive items during the quarter. El Salvador became the first nation to accept bitcoin as legal payment, the most significant technology upgrade in four years, Taproot, was approved by miners and will go into effect in November, and numerous banks and bank technology providers, including Alkami, FIS, Fiserv, NCR, and Q2, are working to enable access to bitcoin through traditional banking venues. On the flip side, Tesla’s about-face in accepting bitcoin for payment, increasing environmental concerns regarding mining, and China’s crackdown on trading and mining weighed heavily on bitcoin during the quarter. We continue to think the elimination of the China overhang will ultimately be good for bitcoin and migration of hash power out of China allows the industry to make bitcoin mining greener and more efficient.
Bitcoin’s declining hash rate amidst the China mining crackdown was one of the most widely discussed topics during the quarter. With nearly a 70% reduction from the peak so far, bitcoin’s hash rate underwent a severe correction as China made a push to shut off mining in every major province. While it remains to be seen where or when that hash rate comes back online, along with the reduction in the hash rate came a swift reduction in electricity consumption. Data from the Cambridge Centre for Alternative Finance indicates that electricity consumption is down 55% from the peak of 143.9 TWh to 64.7 TWh at the end of June. Investors should rest easy that even though the hash rate has come down, bitcoin is still very secure and bi-weekly difficulty adjustment ensures that blocks continue to be produced at regular intervals.
Throughout the quarter, we received numerous questions about bitcoin's “dominance,” its market cap as a percentage of the overall industry market cap. Dominance can be a noisy signal as the denominator in the measurement, the size of the industry market cap is not stable in terms of the number of constituents. The cryptocurrency industry is secularly growing, and new assets are created, launched, or come into existence daily. This makes comparing dominance levels from cycle to cycle a challenge, but we do think there is some information to glean about cycles and investor preferences from the change in dominance. The following graph highlights some important markers in the history of bitcoin dominance.
Looking Ahead
With the difficult 2Q21 behind us now, we think it’s important to look ahead to some of the events that we think will shape the coming months and quarters. On July 21st, Elon Musk and Jack Dorsey will have “the talk” at The B Word conference hosted by The Council for Crypto Innovation, Ark Invest, Square, and the well-respected VC firm Paradigm. Presumably “the talk” centers on Bitcoin’s energy consumption, an issue that Musk has aired many times online and the primary reason Tesla stopped accepting bitcoin for payment. Taproot, the most significant technical update to Bitcoin since 2017, will be activated on block 709,632 sometime in mid-November. The growing adoption of bitcoin as a financial asset by institutional investors continues, with names of new well-respected investors in the news regularly. Numerous bitcoin ETF applications continue to work through the SEC process. Finally, the activation of millions of potential bitcoin customers through traditional banks and financial institutions is underway thanks to the efforts of our organization and our banking and technology partners. To us, the secular growth case for the asset has never been clearer.Thanks for joining us again this week. Please reach out with any questions or comments.
Sincerely,
GREG CIPOLARO
GLOBAL HEAD OF RESEARCH
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