In the second half of 2020, institutional investors showed increasing interest in Bitcoin. More and more investors have announced that they will be providing part of their cash reserves or part of their fund for Bitcoin.
The most prominent was certainly Michael Saylor with his company MicroStrategy, which currently holds 70,470 Bitcoin. Another important development was the conversion of part of their fund into Bitcoin by the MassMutual Life Insurance Company. The latter example in particular has given Bitcoin much more legitimacy as an institutional asset. An insurance company that thinks Bitcoin is safe enough to invest in is changing the game, as this industry is typically known for its very conservative investment strategies.
The inflow of institutional money appears to have become a self-reinforcing mechanism. The Grayscales Bitcoin Trust alone increased its Bitcoin holdings from 365,090 on June 9, 2020 by more than 66 percent to 607,270 Bitcoin on December 28, 2020 per bybt.com. During an appearance in CNBC’s “Squawk Box”, Michael Sonnenshein, managing director of Grayscale, said that inflows can be seen on his platform that are six times higher than last year and that the type of investors has changed. Some of the biggest investors are investing in grayscale right now, and these investors are holding Bitcoin for the medium to long term.
While there is a ripple effect for institutional investors, what is the main reason? Why do these investors see the need to convert some of their capital into Bitcoin? Saylor speaks often about the need to convert a company’s cash reserves into Bitcoin to protect its balance sheet from the depreciation of fiat currencies, and more specifically the US dollar (USD), which has depreciated against other currencies this year (as later shown) in this article).
In a previous article I found that Google search in USD is strongly related to Bitcoin search, and I hypothesized that the effects of dollar devaluation are more directly perceived by people and this leads to a spike in bitcoin -Kaufs leads.
The USD has generally depreciated against other major currencies. This can be seen in the USD Index (DXY), which contains a basket of the following six exchange rates: EURUSD, USDJPY, GBPUSD, USDCAD, USDSEK and USDCHF.
Perhaps one reason for this is the Federal Reserve Bank’s unprecedented monetary expansion. This year, however, not only has the Fed expanded its balance sheet – central banks like the European Central Bank (ECB) and other factors also play a role, which is why it makes sense to look at the DXY affected by all of these factors. Changes in the global monetary landscape are also a major factor, as outlined in Lyn Alden’s excellent article, “The Unraveling of the US Global Reserve System”. For this reason, it makes sense to look at the DXY development in terms of the Bitcoin price.
Before we look at the relationship of the USD index to bitcoin price, let’s first examine the Fed balance sheet and bitcoin price. This relationship is shown in Figure 1.
Bitcoin price and the size of the Fed’s balance sheet appear to be in some way related. However, the price does not directly follow the expansion of the balance sheet in the first half of the year.
This can also be seen in the correlation coefficients in Table 1. Over the entire period, both variables are correlated by 47.65 percent, while they are only 6.20 percent in the first half of the year and increased sharply to 86.41 percent in the second half of the year. A very similar picture emerges for the money stocks M1 and M2 this year.
While M1 has increased by over 65 percent, M2 has increased by almost 26 percent. The relationship between the monetary variables and the Bitcoin price appears to exist, but does not appear to be as strong as it is in DXY.
Throughout the year, the value of the DXY shows a strong negative relationship with the Bitcoin price (see Table 1). It’s much higher compared to the other two variables. This makes sense when you consider that the US dollar has depreciated not only in monetary policy but also due to other mechanisms. Because of this, the dwindling value of the USD against other currencies seems to be the more relevant variable.
In Figure 2, the DXY tracks Bitcoin price surprisingly well. This seems to be mostly true in the second half of the year after the DXY dropped below 95 on July 22, 2020. This also seems to coincide with a surge in institutional interest in July and August. Interestingly, in the first half of the year, when the DXY was mostly between 95 and 100, the DXY seems to be positively linked to the Bitcoin price.
However, the correlation was already negative in the first half of the year (-0.4015). This only got stronger in the second half of the year with a coefficient of -0.8253. While the dollar value hadn’t been that important in the first half of the year, the breakdown of value seemed to have pushed investors over the edge and thus increased their relevance to Bitcoin price.
While the above relationships are just correlations, the relationship nonetheless appears to be strong and, as a narrative, a major driver of institutional interest. Regardless of what you think of which of these variables is effectively driving the institutions into Bitcoin, monetary policy and the dwindling value of fiat currencies seem to be at the fore.
It appears that loose monetary conditions will continue, and as Alden explains in the above article, the trend of the USD depreciating against other currencies is likely to continue in the future. Given the declining outlook for the USD versus other currencies, the depreciation of currencies against hard assets, the unprecedented monetary intervention that seems to remain here, and the domino effect in 2021, more institutional investors are expecting Bitcoin to invest in Bitcoin. All in all, that’s bullish for Bitcoin.
This is a guest post by Jan Wuestenfeld. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.