Institutional Investment In Bitcoin

Institutional investment in bitcoin has seen a steady increase over the past decade. While for some, this raises concern for the potential of crowding out retail investors, the opposite is likely to be true. A rise of involvement from institutions has increased market liquidity, price stability and aided in a heightened reputation among governments and regulators.¹ Despite this, wide adoption has been stifled because of limited understanding surrounding how to invest as well as a strong desire for regulatory standards consistent with existing investment opportunities.

A key foundation for institutional involvement in the crypto space is a strong link between the cryptocurrency and present-day financial frameworks. In 2013, this came to fruition with the launch of the Grayscale Bitcoin Trust which gave private placements to accredited investors. Shortly after launching, the fund received FINRA approval allowing eligible shares to be traded publicly under “GBTC” on the OTCQX.² While the fund has made strides since its inception, the role it has played since the Black Swan market crash earlier this year has been fundamental to promoting wider institutional investment in bitcoin. In Q2 2020, the fund’s inflows almost doubled from the previous quarter, sitting at US$905.8m.³ This boosted investment is largely due to the increase in bitcoin’s perceived security, asymmetrical returns and anti-inflationary properties, particularly in times of economic uncertainty. 

While GBTC was the first of its type, competitors are beginning to enter the market as links to the current financial framework are strengthened and validated. Industry giant Fidelity Investments will soon launch its inaugural bitcoin fund under the guise of Fidelity Digital Assets.⁵ The establishment of this fund is aimed to increase investment feasibility for institutional investors. With a minimum investment of US$100,000, interest has been evident among family offices and hedge funds wishing to dip their toes into the increasingly popular space. With the first movers beginning to show the value of their early investments, interest is growing rapidly.

Early adoption

Early institutional investment in bitcoin predominantly utilised over-the-counter (OTC) intermediaries to attain bitcoins for institutions. Although, in 2015, Ark Invest committed a sizable portion of its portfolio into GBTC, over the past five years the company’s investment peaked at approximately US$2.5b across all their funds.⁶ The groundbreaking initial investment was justified as a tactical attempt to place the firm ahead of the investment curve. At the time, Ark saw bitcoin as an opportunity to bet big on the future use case for the currency and its underlying technology in a variety of industries that were beginning to consider how it might impact them.⁷

Bitcoin was seeing a relative increase in price and trading volume. However, it still lacked key investment signals for the majority of institutions. Enterprise interest was increasing significantly, although investor sentiment in the traditional venture capital space was sceptical at best. Volatility was still wide, due to increasing popularity and speculation. In addition, huge security concerns had been raised in previous years, causing unease among any investor hoping to commit significant funds. The case of Mt Gox was by far the most prominent example of the risk surrounding cryptocurrencies at the time. In 2014 the exchange filed for bankruptcy and announced that hackers had stolen 850,000 bitcoins.⁸ Security concerns on crypto exchanges have been a concern since they were created and have often been used as a means to discredit cryptocurrencies like bitcoin as a viable investment. When you combine this with the currency’s perceived link to global organised crime, institutional investor’s caution was warranted.

Increasing popularity of institutional investment in bitcoin

Much of the concern of institutions at that time was driven by the lack of regulation and familiar frameworks. Now the financial industry is positioned for a strong integration of the cryptocurrency space into the existing structure. Not only have key players shown interest in establishing crypto funds, many big-name institutions have committed to holding bitcoin as a portion of their portfolio. With the likes of Visa, Paypal and Microsoft all targeting specific crypto-based developments, the world can expect to see wide integration of blockchain technology in the coming years. A recent study conducted by Evertas (the world’s first cryptocurrency insurance firm) found that 64% of 50 of the largest institutional investment firms across England and the USA expect to see a volume increase in their crypto investment in coming years. A further 26% believed they would see the depth of their crypto investments skyrocket.⁹

A significant portion of this newfound faith is based on the development of key financial tools that bring bitcoin investment to the same standard as traditional financial investments. Foremost, the widespread prominence of custody services for OTC transactions has paved the way for heightened levels of regulation and security. In dealing with large portions of bitcoin, custody services offer institutions dedicated and secure holding of their assets, limiting the potential for loss and theft. 

One promising extension of wide-use custody by OTC firms is the potential for yield generation on holdings. While bitcoin derivative markets have been present for several years, increasing stability has positioned firms to maximise client wealth-generation while banking with them. By taking advantage of these derivatives markets, firms can utilise holdings to maximise capital growth on the institution’s investments and further broaden the suite of services offered to their client base. 

With the novel addition of institutional-grade protections for any investment conducted on this scale, security and confidence are currently unparalleled. Education has developed gradually and particularly among institutions. There is substantial data that has followed bitcoin through full cycles and a greater understanding surrounding its influencers and markers are more commonplace. As the bitcoin price acts differently to any other commodity, this data and knowledge-base is paramount for money managers. Institutional standards have reduced the risks in accessing these markets, from regulated venues such as the CME and CBOE, to most recently, Diginex’s NASDAQ listed exchange, Equos.

Q2 and Q3 of 2020 saw an astronomical uptake in institutional investment in bitcoin, mainly due to wild prices during the Black Swan crash earlier in the year. The uncertain economic climate allowed bitcoin’s risk-hedge properties to shine, as prices launched to US$12,000 in the months following the March low. Having established itself as a store of value and anti-inflationary asset, alongside gold and precious metals, committed investment into bitcoin is likely to continue. 

At the beginning of 2020, 64% of bitcoin’s circulating supply had been held in the same wallets since 2018.¹⁰ This could be indicative of an upcoming bull-run as many of these investors are yet to see a price valuation that they agree with. With an ever-increasing percentage of circulating bitcoin being held by institutions, we are likely to see a price spike in the coming 12-24 months as many large bag holders have no intention of parting with their bitcoin at current price levels, maintaining limits on the supply curve. The majority of bitcoins purchased during the past 6 months will likely be held long-term with the same intention while the global economic outlook holds course. Thus, we are likely to see a surplus of demand and constricted supply in this valuable asset during a time of crisis. As the space heats up, a large investment is expected from a multitude of entities.

Bitcoin is becoming an increasingly feasible investment for those who wish to capitalise on the impact that crypto assets are having on traditional financial markets. Not only does it protect institutions from portfolio risk, it actively combats inflation and has the potential for a steep value increase. Institutions are at the early stages of the adoption curve and have the opportunity to protect their client’s portfolio diversity and growth. At a time when other markets are uncertain, bitcoin is a reliable source of stability that will continue to be valued as a new-age “digital gold”. 

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Citations

1. Chandler, S. (2020). Institutional Investors Could Help Push Bitcoin to New Heights. Retrieved from CryptoVantge: https://www.cryptovantage.com/news/institutional-investors-dominate-crypto-market-heres-why-thats-bullish-for-bitcoin/

2. Reiff, N. (2020). What is the Grayscale Bitcoin Trust? Retrieved from Investopedia: https://www.investopedia.com/news/why-buy-expensive-bitcoin-etf-instead-actual-bitcoin/#:~:text=The%20Grayscale%20Investment%20Trust%20debuted,Trust%20under%20the%20symbol%20GBTC.

3. Ibid, 1.

4. Trading View. (2020). GBTC. Retrieved from Trading View: https://www.tradingview.com/symbols/OTC-GBTC/

5. McDonald, M., & Hajric, V. (2020). Fidelity Launches Inaugural Bitcoin Fund for Wealthy Investors. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2020-08-26/fidelity-launches-inaugural-bitcoin-fund-for-wealthy-investors

6. Bybit Insight. (2020). Who are the Mysterious Owners of GBTC? Retrieved from Bybit: https://blog.bybit.com/insights/who-are-the-mysterious-owners-of-gbtc/

7. ARK. (2015). ARK Invest Becomes First Public Fund Manager to Invest in Bitcoin. Retrieved from Cision: https://www.prnewswire.com/news-releases/ark-invest-becomes-first-public-fund-manager-to-invest-in-bitcoin-300143030.html institutions

8. Frankenfield, J. (2020). Mt. Gox. Retrieved from Investopedia: https://www.investopedia.com/terms/m/mt-gox.asp

9. Liljeqvist, I. (2020). Institutional Companies Investing in Bitcoin and Exploring Crypto. Retrieved from Ivan on Tech: https://academy.ivanontech.com/blog/institutional-companies-investing-in-bitcoin-and-exploring-crypto

10. Pirus, B. (2020). A Critical Mass Of Long-Term BTC HODLers Seem To Be Making $100k Inevitable. Retrieved from Coin Telegraph: https://cointelegraph.com/news/a-critical-mass-of-long-term-btc-hodlers-seem-to-be-making-100k-inevitable

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FAQs

1. How Has Institutional Investment in Bitcoin Evolved Over the Past Decade, and What Impact Has It Had on the Market?

Answer: Institutional investment in Bitcoin has seen a steady increase over the past decade, leading to increased market liquidity, price stability, and a heightened reputation among governments and regulators. Early institutional investment utilized over-the-counter (OTC) intermediaries, with key milestones like the launch of the Grayscale Bitcoin Trust in 2013. The Black Swan market crash in 2020 further fueled institutional investment, with Q2 inflows almost doubling to US$905.8m. This growth has contributed to Bitcoin’s perceived security and anti-inflationary properties, particularly during economic uncertainty.

2. What Are the Key Financial Tools and Developments That Have Facilitated Institutional Investment in Bitcoin?

Answer: Key financial tools and developments include the establishment of crypto funds like Grayscale Bitcoin Trust and Fidelity Digital Assets, custody services for OTC transactions, and the potential for yield generation on holdings. The widespread prominence of custody services has enhanced regulation and security, while the utilization of derivatives markets has enabled firms to maximize capital growth. These tools have brought Bitcoin investment to the same standard as traditional financial investments, reducing risks and increasing confidence among institutions.

3. How Have Security Concerns and Regulatory Challenges Influenced Institutional Investment in Bitcoin?

Answer: Security concerns, such as the theft of 850,000 bitcoins from Mt Gox in 2014, have historically caused unease among institutional investors. The lack of regulation and familiar frameworks also drove concerns. However, the financial industry’s strong integration of cryptocurrency space into existing structures, along with the development of institutional-grade protections, has alleviated these concerns. The increased regulation, security, and education surrounding Bitcoin have gradually built confidence and understanding among institutions.

4. What Role Have Industry Giants Like Visa, Paypal, and Microsoft Played in the Increasing Popularity of Institutional Investment in Bitcoin?

Answer: Industry giants like Visa, Paypal, and Microsoft have shown interest in establishing crypto funds and committing to holding Bitcoin as part of their portfolio. Their targeting of specific crypto-based developments has signaled wide integration of blockchain technology in the coming years. This involvement by key players has validated the cryptocurrency space and contributed to the increasing popularity of institutional investment in Bitcoin, reflecting a broader shift towards acceptance and integration in traditional finance.

5. How Does Bitcoin Serve as a Reliable Source of Stability for Institutional Investors, and What Are Its Future Prospects?

Answer: Bitcoin is seen as a reliable source of stability for institutional investors, protecting portfolios from risk, combating inflation, and offering the potential for value increase. Its anti-inflationary properties and status as a store of value, alongside gold and precious metals, have established it as a risk-hedge asset. With an ever-increasing percentage of circulating Bitcoin held by institutions, a price spike is anticipated in the coming 12-24 months. As a “digital gold,” Bitcoin is likely to continue to be valued, especially during times of economic crisis.