Bitcoin is now a $ 1 trillion asset. It’s more valuable than Tesla and Facebook, and right now, only six companies have larger market capitalizations than Bitcoin.
Still, I’m not interested in talking about the “crazy gains” of Bitcoin. I want to talk about the dominant narrative behind Bitcoin in late 2020 and so far in 2021: increased institutional investment.
Before you do, here’s a little manual. What exactly is Bitcoin? Well, according to Lily, a 3-year-old girl who is also bitcoin HODLer, “Bitcoin is digital money“I couldn’t have put it better myself!
Institutions hooked on Bitcoin
As for institutions, Bitcoin has jumped undesirable a undeniable. A few years ago, some of the most important names in finance ruled out Bitcoin as a scam. Warren Buffet went so far as to label it as “square rat poison.” JP Morgan also jumped on the Bitcoin hate train and labeled it as a scam. Since then, JP Morgan has changed its tune and now expects the price of Bitcoin to rise to $ 130,000, labeling it as “digital gold”. They have since created a “cryptocurrency display basket” of Bitcoin proxy values.
Tesla and Elon Musk have been dominating the headlines because of their $ 1.5 billion investment in Bitcoin, and now accept Bitcoin as a payment method for Tesla vehicles. Prior to that, MicroStrategy, the largest and most independent independent business intelligence company, had bought more than 90,000 BTC.
In mid-December 2020, UK-based asset manager Ruffer announced he had amassed bitcoin worth £ 550 million in a cumulative investment since November, allocating 2.7% of the portfolio. from the company to bitcoin. In addition, BlackRock, the world’s largest asset manager, also announced that it has “started practicing” Bitcoin.
Bitcoin is considered a potential hedge against global economic instability, but like Tyler Winklevoss dit, the opportunity lies in being an early adopter.
Why do institutions want it?
Currently, institutions are entering the market because they now understand the credibility of Bitcoin as a value reserve. Bitcoin has been seen as a safe haven asset alongside gold, and has never been as evident as during the COVID-19 pandemic. Over the past year, Bitcoin has significantly outperformed all other asset classes. At one point, it was exceeds the Nasdaq 100 by 300% and the S&P 500 by almost 1600%.
To date (YTD), bitcoin has also surpassed the top-performing technology companies in the FAANG group (Facebook, Amazon, Apple, Netflix and Google). With an 80% gain in YTD, Bitcoin has also surpassed virtually gold (29% in YTD) as a safe haven asset.
Because of the unique challenges presented in 2020, Bitcoin has been able to add credibility to its status as a capital preservation asset that can act as a hedge against financial uncertainty.
Institutions did not want to invest in Bitcoin: they had to invest in Bitcoin.
I think this narrative will stay strong for the next decade. Many Fortune 500 companies will follow Tesla’s example and convert parts of their balance sheet into bitcoins. Companies like MicroStrategy and Chamath Palihapitiya’s share capital are already ahead of the curve with their large investments and many more will continue to play to the day. Kate Rooney’s chief financial officer, after buying an additional $ 170 million worth of bitcoin, said, “Bitcoin has the potential to be the Internet’s native currency and we want to participate in it.”
We may see more retailers selling their products directly for bitcoin, which will open up additional use cases. In fact, Tesla already accepts bitcoins for its vehicles.
Will ETFs open the floodgates?
In early February, the Ontario Securities Commission made a decisive decision to approve Purpose Investments Inc.’s application. to launch a Bitcoin Exchange Trading Fund (ETF), the first legal and fully regulated Bitcoin ETF in North America. In its first 48 hours, the ETF had already raised $ 421 million, crushing all estimates. Proportionally speaking, this is the equivalent of a US ETF that has earned $ 8 billion in the first two days. It is about to become Canada’s largest ETF in 20 days.
Earlier, both Gemini Exchange and investment firm VanEck tried to bring regulated Bitcoin ETFs to the US market. However, both were repeatedly rejected by the United States Securities and Exchange Commission (SEC). Luckily, President Joe Biden has named Gary Gensler, a researcher and professor of cryptocurrencies, as the next SEC chair, and it is very likely that the United States will finally get a Bitcoin ETF soon.
So why is this news important?
ETFs could incorporate a new class of institutional investors who want to diversify their portfolios and minimize risk exposure. In addition, ETFs offer a low-cost way to enter a new market, can be traded 24 hours a day and always maintain high liquidity. All of these factors make them dear institutional investors, and that bodes well for Bitcoin.
The positive implications of rushing institutions
There are both short- and long-term implications for institutional investors rushing to invest in Bitcoin. The most obvious short-term factor is the shock and fear effect of a rockstar company like Tesla buying big chunks of bitcoin. It often acts as a “shot in the arm” for the price of bitcoin and pushes it to new heights.
However, the long-term implications are what is really interesting. Bitcoin has a maximum bid limit of 21 million coins. Of these, more than 18.5 million have already been extracted. When there are only 2.5 million coins left for me, and the institutions show more interest, there is a huge supply crisis that will drive up the price.
The misconceptions surrounding investing in Bitcoin
The author who came up with the concept of a “black swan event,” Nassim Nicholas Taleb, has written a lot of hate tweets about Bitcoin. Taleb said:
I think this criticism is unfair because currently, the main use case of Bitcoin is as a store of value. The regular payment mode “will be layers of abstraction above Bitcoin. It is a testament to the versatility of Bitcoin which has so many potential use cases and is robust enough to build an entire ecosystem. Bitcoin only exists between 12 and 13 years and as the network matures, we will see more sophisticated financial products.
Moral of the story: Despite Bitcoin’s explosive growth, don’t forget that 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 an appropriate paradigm shift.
It is possible that some economists will continue to hate Bitcoin with passion because it is such a revolutionary asset that it works differently from traditional legacy markets. After all, technically, Bitcoin goes against the conventional economy.
However, sooner rather than later, everyone will have to evolve over time. Companies evolving with this changing landscape of fintech technology, such as Tesla, MicroStrategy and Square, have realized that in the future finance will work on the Internet and not on the surprisingly fantastic buildings on Wall Street. For now, we need this critique.
Final thoughts
Like Elon Musk put it, with the advantage of retrospective, institutional investment in bitcoins was inevitable. This sentiment has further consolidated Bitcoin as a legitimate asset class and more robust hedging against financial uncertainty. The COVID-19 pandemic has shown that the latter is completely and irrevocably true. With major companies like Oracle rumored to invest in bitcoin next year, I hope 2021 will be a pivotal year when Bitcoin will firmly secure its place in the mainstream.