Why Institutional Investors Are Rushing Into Bitcoin

Staff
April 23, 2021

Retail investors are beginning to wonder if we are reaching the tipping point for bitcoin.  With the February announcement that Tesla purchased over $1.5 Billion worth of the cryptocurrency and began accepting it for payments of their autos, the Bitcoin price jumped 16%.  Tesla and its leader Elon Musk have always been at the forefront of new technology, but is other smart money already doing the same or going to follow closely behind it?  

There should be one of two possible answers to this possibility.  Either they are jumping in or not.  And funny enough, the answer is not so easy.  It is both yes and no.  With finance, there is always a grey area, and this is one of them.

If we look at how much Bitcoin is being purchased by institutional investors (Smart Money), we see a huge increase, but compared to what?  There are a few numbers we must first keep in mind.  There is currently about 18.6 million total Bitcoin that have been mined since its inception in 2013, with a total eventual supply of 21 million, leaving only a 2.4million left to be mined over the coming years.  The market cap for all cryptos currently stands at $2.1 trillion, with Bitcoin making up half of that.  For comparison, the current Market Cap for the S&P 500 stocks is $33.4 trillion.  There is also a free circulation of only 4 million bitcoin of that 18.6 million total mined coins; this is important.  This low free circulation means a typical supply and demand curve that results in Bitcoin price going up if the liquid supply is insufficient for the demand.  Glassnode, an analysis firm that covers cryptos, has reported with a recent newsletter that it discovered that in 2021 institutions are now consistently buying more bitcoin each month than that which is what is being mined, and therefore, there isn’t enough supply for everyone; hence we have seen a massive increase in Bitcoin’s price.

You can see from the above graph that the demand for bitcoin since the start of the pandemic has been such that there is an undersupply, only briefly going green two times over the past year.  Fewer long-term bitcoin holders seem to be reducing their positions or taking profits with liquid bitcoin reducing as a percentage of the total. 

Big Wall Street firms like Citigroup, Goldman Sachs, and BlackRock have begun their own trading in cryptocurrencies while the two payment giants, PayPal and Square Cash, begin to allow their users to buy and sell the digital assets.  

So why is this happening now?  

There are a few reasons why this movement into Bitcoin is happening.

  1. There is a worry about inflation of the USD; the FED has printed money to keep the economy afloat, but this will eventually end.  Bitcoin is slowly growing as a Store of Value (SOV) like gold for keeping funds.  If there are no changes to Bitcoin’s hard cap, there will only be 13% more bitcoin than there are now mined, while an infinite supply of dollars can still be printed.  This means that Bitcoin’s inflation will decrease to zero over the coming years. Bitcoin’s current inflation is in line with that seen in the US dollar over the past decade.

The Federal Reserve's balance sheet has shot up

2. COVID stimulus has held the markets up, and people are starting to look for other places to take profits before a potential bubble burst.  They are looking to Bitcoin as a potential investment which has increased in value by 700% in the last year.

Bitcoin 1 Year Price Chart Courtesy of Coinbase

3. With ZIRPs(zero interest rate policies), money can be borrowed at extremely low rates and can be invested in bitcoin with massive potential for returns. 

So what do Institutions say/do?

The other side of the coin is where the minds of the “Smart money” are currently.  In a recent survey of 3,400 institutional investors representing 1,500 institutions, JP Morgan found that 78% said their firms were unlikely to invest in or offer trading services for crypto, but 58% of the respondents said crypto is “here to stay.” Only 21% called it a “temporary fad.”  

The finance industry is not always the front runner in pushing the envelope but looking at another survey of 1,800 tech professionals conducted by Blind found that 57% currently own some crypto.  These professionals are going to demand services from banks even if they don’t believe they will provide them yet.  

Finally, the large wallets of bitcoin tell a story.  In 2020 wallets holding 1000+ bitcoin grew by 17% (302 wallets).  The number of individual addresses, which have at least 1,000 Bitcoin, is also up over 7% to 2,270 addresses, at the current bitcoin price is a minimum of $55 million in value. 

Summary

Though some institutional financial leaders say they and their companies will not invest in Cryptos, the data does not lie.  Several large institutions have moved to accept Bitcoin as a method of trade.  Multinationals have begun to allow for its acceptance.  Bitcoin’s nature gives it low and predictable inflation, making it a good store of value. The current stock market and covid economy have moved to make Bitcoin investment more enticing. Our experienced fund management team can provide institutional clients with exposure to this incredible asset class and we are set to launch our hedge fund in August 2021. 

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