Bitcoin is now a $ 1 trillion fortune. It’s more valuable than Tesla and Facebook. Currently, only six companies have a market capitalization larger than Bitcoin.
However, I’m not interested in talking about the “insane profits” of Bitcoin. I want to talk about the dominant narrative behind Bitcoin in late 2020 and so far in 2021: increased institutional investment.
Before I do that, here’s a little primer. What exactly is Bitcoin? According to Lily, a 3 year old who is also a Bitcoin HODLer, “Bitcoin is digital money”. I couldn’t have put it better myself!
Institutions that bet on Bitcoin
As for the institutions, Bitcoin has jumped off undesirable to undeniable. A few years ago, some of the biggest names in finance dismissed Bitcoin as a scam. Warren Buffet went so far as to call it “rat poison in the square”. JP Morgan also jumped on the Bitcoin hate train, calling it a scam. JP Morgan has since changed its mindset and now expects the price of Bitcoin to rise to $ 130,000, which is what it calls “digital gold”. Since then, they have created a “cryptocurrency exposure basket” of bitcoin proxy stocks.
Tesla and Elon Musk dominated the headlines for their $ 1.5 billion investment in Bitcoin and are now accepting Bitcoin as a payment method for Tesla vehicles. Previously, MicroStrategy, the largest independent publicly traded business intelligence company, had bought more than 90,000 BTC.
In mid-December 2020, UK-based wealth manager Ruffer announced that it has amassed £ 550 million worth of Bitcoin in a cumulative investment since November, setting up 2.7% of the company’s portfolio for Bitcoin. Additionally, BlackRock, the world’s largest wealth manager, announced that it has started looking into Bitcoin.
Bitcoin is seen as a potential hedge against global economic instability, but as Tyler Winklevoss said, the chance lies in being an early adopter.
Why do institutions fly in?
Institutes are currently diving into the market because they understand Bitcoin’s credibility as a store of value. Bitcoin is considered a safe haven alongside gold, and this has never been more evident than it was during the COVID-19 pandemic. In the past year, Bitcoin has clearly outperformed every other asset class. At one point, it outperformed the Nasdaq 100 by 300% and the S&P 500 by nearly 1600%.
Since the beginning of the year (YTD), Bitcoin has also outperformed the top performing technology companies in the FAANG group (Facebook, Amazon, Apple, Netflix and Google). With a year-to-date gain of 80%, Bitcoin has also clearly outperformed gold (29% year-to-date) as the safe haven of choice.
Due to the unique challenges facing up to 2020, Bitcoin has been able to give more credibility to its status as a capital conservation tool that can serve as a hedge against financial uncertainties.
Institutions didn’t want to invest in bitcoin – they had to invest in bitcoin.
I believe this narrative will stay strong for the next decade. Many Fortune 500 companies will follow Tesla’s lead and convert portions of their balance sheets into Bitcoin. Companies like MicroStrategy and Chamath Palihapitiya’s Social Capital are already ahead of the curve with large investments, and many others will continue to catch up. Kate Rooney, CFO of Square, said after purchasing $ 170 million worth of Bitcoin, “Bitcoin has the potential to be the internet’s native currency and we want to be part of it.”
Perhaps more retail companies will sell their products directly for Bitcoin, which will open up more use cases. In fact, Tesla is already accepting Bitcoin for its vehicles.
Will ETFs open the floodgates?
In early February, the Ontario Securities Commission made a landmark decision approving Purpose Investments Inc.’s application to launch a Bitcoin Exchange Traded Fund (ETF), the first legal and fully regulated Bitcoin ETF in North America. Within the first 48 hours, the ETF had already raised $ 421 million, which dashed all estimates. In proportion, this equates to a US ETF raising $ 8 billion in the first two days. It is well on its way to becoming the largest ETF in Canada in 20 days.
Previously, both Gemini Exchange and investment firm VanEck attempted to bring regulated Bitcoin ETFs to the North American market. However, both were rejected several times by the US Securities and Exchange Commission. Fortunately, President Joe Biden has named Gary Gensler, a cryptocurrency researcher and professor, as the next SEC chair, and it is very likely that the US will finally get a Bitcoin ETF soon.
Why is this important news?
ETFs could involve a whole new class of institutional investors looking to diversify their portfolios while minimizing their risk. In addition, ETFs offer a cost-effective way of entering a new market, can be traded around the clock and always have a high level of liquidity. All of these factors make them institutional investors’ favorite, and this bodes well for Bitcoin.
The positive effects of institutions creeping in
There are both short-term and long-term implications when institutional investors invest in Bitcoin. The most obvious short-term factor is the shock and awe effect of a rock star company like Tesla buying huge bits of bitcoin. It often acts as a “shot in the arm” for the price of Bitcoin, taking it to new heights.
However, the long-term effects are really interesting. Bitcoin has a maximum delivery limit of 21 million coins. More than 18.5 million of these have already been mined. Since only 2.5 million coins have to be mined and the institutions are showing more interest, there is an enormous supply crisis that will drive up the price.
The misconceptions related to Bitcoin investing
The author who developed the concept of a “Black Swan Event”, Nassim Nicholas Taleb, has written a number of hateful tweets about Bitcoin. Calling Bitcoin a “bug”, Taleb said:
I think this criticism is unfair as the main use case of Bitcoin is currently a store of value. The type of regular payment “are levels of abstraction about Bitcoin. It is a testament to Bitcoin’s versatility that there are so many potential use cases and that it is robust enough to build an entire ecosystem. Bitcoin has only been around for 12 to 13 years, and as the network matures we will see more sophisticated financial products.
Moral of the story: Don’t forget that despite Bitcoin’s explosive growth, the market is still very young and has more room to grow. Bitcoin has become a trillion dollar asset in such a short period of time because it represents a real paradigm shift.
Some economists may continue to hate Bitcoin passionately for being such a breakthrough commodity that works differently from traditional legacy markets. Technically, Bitcoin contradicts the conventional economy.
However, sooner than later everyone must develop over time. The companies that are evolving with this changing fintech landscape, such as Tesla, MicroStrategy, and Square, have realized that future funding will come from the internet rather than the stunningly fancy buildings on Wall Street. At the moment we need this criticism.
In hindsight, as Elon Musk put it, institutional investments in Bitcoin were inevitable. This sentiment has further cemented Bitcoin as a legitimate asset class and most robust hedge against financial uncertainty. The COVID-19 pandemic has shown that the latter is completely and irrevocably true. Given the rumors that big companies like Oracle will be investing in Bitcoin next, I expect 2021 will be a tipping point as Bitcoin solidifies its place in the mainstream.