Influx Of Institutional Investors Causes Bitcoin To Perform More Like A Traditional Asset (#GotBitcoin?)
Bitcoin Trading At Strong Correlation With Gold As Traditional Investors Step In. Influx Of Institutional Investors Causes Bitcoin To Perform More Like A Traditional Asset (#GotBitcoin?)
One example of institutional money coming into the sector is the growth of the Bitcoin Investment Trust, an over-the-counter exchange-traded fund sold by Grayscale Investments. In 2013, its first year of existence, the trust had $51 million in assets under management. By the end of 2017, assets had swelled to about $3.5 billion. With the selloff this year, that had fallen to about $900 million recently. Influx Of Institutional Investors Causes Bitcoin To Perform More Like A Traditional Asset
Not too long ago, bitcoin and its universe of cryptocurrency peers seemed light years away from traditional markets, a distant point where assets traded under their own laws of physics.
But capital and investors from traditional markets have flowed into cryptocurrencies, making some of them behave like traditional assets—just far, far riskier.
Bitcoin has had a terrible year. It dropped by more than half in the first several weeks of 2018, wobbled up and down for several months and then tumbled sharply again in the fourth quarter alongside wilting stock markets. For an asset branded as an alternative to the traditional financial system, it has offered little haven. Bitcoin stood at $3,630.94 Thursday evening. Its high for the year came near $17,000 in January.
Bitcoin’s correlations to other assets aren’t strong, but they are measurable. On a scale of -1 to +1, ranging from completely inverted to perfectly correlated, bitcoin traded at about a 0.84 correlation to gold over the past five days, according to data from research firm Excalibur Pro Inc. That isn’t unexpected for an asset its backers bill as a new version of the yellow metal. Bitcoin also traded at a 0.77 correlation to the Chicago Board of Options Exchange’s VIX index, which measures market volatility.
Reviewing the Year in Cryptocurrency
It makes sense that bitcoin would trade in step with the market’s “fear gauge.” With central banks over the past decade flooding global markets with liquidity and with extremely cheap borrowing costs, money found its way into riskier assets. And there is no riskier asset than a rebel currency.
Another pathway has been venture capital. In 2013, venture-capital investment in the bitcoin and blockchain sector totaled only $96 million, according to data from CoinDesk. In 2016, it was about $500 million. By the end of 2017, all-time VC funding climbed over $2 billion.
Whatever the actual dollar flows are in the future, traditional capital appears set to continue coming into crypto markets. Bitcoin’s backers are making efforts to attract institutional money to their asset class. They are building services like exchanges that can pass regulatory muster, futures trading and even exchange-traded funds.
If any of those efforts is successful, then more professional money will likely come into the sector.
CME Bitcoin Trading Product Records Show Institutional Participation Uptick
The Chicago Mercantile Exchange, or CME, recently saw record Bitcoin trading numbers in multiple categories.
Mainstream market exchange, the Chicago Mercantile Exchange, or CME, recently posted record numbers for its Bitcoin (BTC) trading products.
May 14 yielded open interest of 10,792 Bitcoin futures trading contracts at CME, totalling 53,960 BTC — an all-time high for the product, according to information a CME representative provided to Cointelegraph.
On May 4, CME also tallied 66 large open interest holders, or LOIHs — another record. These LOIH figures in particular indicate added involvement from institutions, the CME representative noted.
CME Bitcoin Options Have Performed Well Since Launch
CME largely opened the door for mainstream Bitcoin participation in December 2017, with the launch of its Bitcoin futures trading product. CME released another crypto trading product in 2020 with its Bitcoin options launch.
Since its BTC options inauguration, CME has seen approximately 5,000 of these contracts trade, equal to about 25,000 BTC in total volume, the CME representative included.
Bitcoin Options Had A Great Week
May 13 and May 14 also hosted two other CME crypto trading records. The outfit’s Bitcoin options product hosted 4,389 BTC worth of contracts — an all-time volume high for the product, as well as record open interest valued at 14,535 BTC worth of contracts, the representative noted.
Contrasting CME’s growing success, the Chicago Board Options exchange, or CBOE, pulled out of the Bitcoin trading race roughly a year and a half after launching BTC futures in December 2017. The CBOE removed its product from the shelves in March 2019, right before Bitcoin began its rally to $13,900.
Institutional Investors Buying Up BTC Like Crazy After Halving
Institutional interest in Bitcoin is experiencing an unprecedented surge, with GBTC alone swallowing up 17% of newly mined Bitcoins.
Both data and first-hand accounts from industry insiders indicates that an interest in Bitcoin (BTC) from institutional investors is accelerating at a rapid pace. This has led some to conclude that the “perfect storm” is about to hit the market.
Price Is Not A Factor
Grayscale Bitcoin Trust, or GBTC, an exchange traded vehicle backed with Bitcoins, has been growing steadily in size over the past several years. However, in the last couple of months, its growth has begun to accelerate. Interestingly, the fluctuation in the price of the underlying asset does not seem to affect this growth pattern. This makes sense, considering that investors have a minimum lockup period of six months.
Grayscale May Swallow Up 550k BTC By 2021
What makes GBTC an important driver of the market dynamics is not only the fact that, according to its spokesperson, over 90% of the inflows come from the institutional players:
“Since inception, 90% of inflows into our family of products comes from institutional investors”.
But also, its holdings diminish the circulating supply of Bitcoin, as its assets are locked away in Coinbase vaults. As of today, GBTC has taken 350,000 BTC out of the circulating supply. This represents 2% of Bitcoin’s circulating supply, not taking into account the number of lost coins.
Since 2019, GBTC has consumed 100,375.93 BTC, which is 17% of all the Bitcoins mined during this time period.
In the last three months, the pace at which institutional investors have been investing into GBTC has tripled. If this trend continues, then in another three months, it will be holding 400, 000 BTC, and in another 6 ½ months after that — March 2021, it will accumulate around 550,000 BTC or 3% of the total supply.
Furthermore, if this forecast comes to fruition, it will imply that GBTC will be gauging up 75% of all newly mined Bitcoins during this timeframe.
It is not clear whether this trend was spurred by the halving, but the metric itself is confirmed by other sources. Alex Mashinsky, CEO of Celsius, the crypto lending platforms that currently holds 55,000 BTC, told Cointelegraph:
“We now have over 260 of them [institutional borrowers] and we did close $10B in loans since launch. The price of BTC does not matter, what matters is volatility of prices going up and down.”
He also added that he could easily lend out another 100,000 BTC if he had it; this is despite the fact that Celsius charges 5 to 12 percent annual interest rate.
Zac Prince, CEO of BlockFi, another crypto lending platform, although the company does not disclose its data publicly, told Cointelegraph that he expects the surge in institutional interest to continue:
“The volatility that characterizes it as a risky investment by some in normal market conditions, has now empowered it to recover faster than any other asset following the initial markets-wide downswing in March – it’s now up 94% since March 16th and continues to climb. We expect to continue to see institutional interest in this asset rise steeply in the next few years accompanied by wider mainstream consumer adoption.”
It’s important to note that unlike Grayscale, platforms like Celsius and BlockFi, probably do not drive the price up, as they do not take their Bitcoins out of circulation; on the contrary, they foster market liquidity.
Another improvement to the supply side of the equation is expected to come from the purging of the mining industry. With inefficient miners leaving the network, the remaining ones will become more profitable and will be able to sell less of their Bitcoins to sustain the operations, reducing the supply.
Matt D’Souza, CEO of Blockware Solutions and who also manages a Bitcoin hedge fund, told Cointelegraph:
“Most funds and hodlers, they’re not shorting really. All of them are long. Most funds are long only. My fund is long only. I’m managing a 15 million and I’d say we’re a decent sized fund. <…> I had a call, MultiCoin two days ago. I had a call with BlockTower last week. So I’m in discussion with all the other funds. And it’s everyone for the most part is long-only on Bitcoin.”
He believes that the combination of the central banks injecting trillions of dollars into the economy and the diminishing issuance of new Bitcoins because of the halving is creating a “perfect storm”:
“You inject two trillion. Maybe they’re going to have to inject more based on how the economy is. <…> A lot of money is going to get injected. And it’s creating a perfect storm for Bitcoin.”
Bloomberg analyst, Mike McGlone, believes that the mainstream adoption will lead to the SEC’s approval of a Bitcoin electronically traded fund, or ETF, in the near future:
“Futures open interest, represents increasing mainstream adoption and indicates the likelihood of an ETF futures on U.S.- listed exchange.”
If this trend continues, data seems to suggest that Bitcoin’s price could appreciate in the next 12-18 months. As D’Souza summarized it:
“What moves price is net fiat in a net fiat out every day. Bitcoin is trading a couple billion in volume that doesn’t move price.”
Regulatory Clarity Leads To Surge In Institutional Crypto Investors
Ciara Sun, head of global markets at Huobi Group says more institutional crypto investors are entering the market.
Ciara Sun, head of global markets at Huobi Group, took part in a Cointelegraph China Great Bay Area International Blockchain Week pre-event interview on July 27. She stressed that although security and lack of infrastructure services might be the biggest hurdle for the crypto industry, more clarity in regulation across the globe has led to a great surge in institutional crypto investors.
Systemic Risks In Crypto Market Infrastructure
The biggest risk in the digital asset space, according to Ciara Sun, is hacking. She stressed that while hacking doesn’t typically lead to massive losses in traditional financial markets, the decentralized nature of digital currencies means there is almost no way to recover lost assets once they are stolen. She added that:
“Unlike banks, crypto exchanges simply act as ledgers for transactions. The actual assets are stored in cold wallets, so losses can be permanent if the keys are stolen. Traditional institutions also have very stringent requirements for insurance and escrow to protect users against losses, but the same can’t be said about many of the smaller crypto exchanges that operate in this space.”
According to Sun, Huobi crypto exchange has made security a priority. She notes that there have been no major security breaches at Huobi for 6+ years. She added an example that:
“We’ve launched an on-chain monitoring tool called Star Atlas to identity and detect illicit activities. Our security team will plan to reveal the security report in a regular routine in the fourth season 2020.”
Lacking Of Infrastructure Services In The Crypto Space
In addition to existing security concerns, Sun pointed out that a lack of services like insurance and custody are major hurdles that prevent many of the larger asset managers and institutional traders from entering the space. She explained:
“These larger institutions have higher compliance requirements but regulatory agencies have not provided enough guidance on digital assets in the past. This unclear regulatory landscape has made it riskier for larger institutions. Additionally, the digital asset space is still tiny compared to traditional markets. In the eyes of traditional institutions, crypto is in its infancy as an asset class but exchanges like ours aim to help provide the liquidity and market depth required for crypto to be a viable investment option.”
More Regulation And Clarity Around Crypto On The Rise
Sun believes while still a nascent industry compared to traditional markets, the digital asset landscape has progressed quite a bit in recent years. “There is now much more regulation and clarity around cryptocurrencies. For example, Singapore, London, Hong Kong, and Japan have all begun regulating crypto with defined policies.”
As nations recognize and regulate digital assets as legitimate financial instruments, more institutional adoption starts to show. On Huobi, according to Sun, there is a 3-4X growth in institutional trading on both our spot and derivative markets since early last year. Institutional clients now account for 40% of Huobi’s trading volume, says Sun. She predicts that:
“2020 will be an especially exciting year for the institutional market as compliance and regulation matures. We are already seeing big Wall Street stalwarts like Tower Research, Renaissance Technologies, and some of the world’s top hedge funds publicly announce their entry into the digital asset market. However, these larger institutions will not trust under-regulated digital asset exchanges, and we are still five years away from market maturity.”
Service Providers Vs Institutional Markets
The price volatility and high liquidity of digital assets are especially attractive to institutional investors, says Sun. The crypto market is unique in that it can fulfil both demands in liquidity and volatility. She continues with an example that:
“Traditional investments like real estate have price volatilities but lack of liquidity. Foreign exchange markets have high liquidity but lack price volatility. Institutional investors see arbitrage opportunities in crypto as an emerging market. The early adopters currently in the market are high-frequency trading institutions.”
Additionally, Sun also believes digital assets can offer institutions a way to hedge risk against volatility in traditional investment markets, adding that:
“Traditional assets are directly influenced by monetary policies and economic measures like quantitative easing, but digital assets are decoupled from the acts of any one nation or governing body. At a time when governments around the world are printing currency to stabilize their economies, digital assets can be one way to hedge against inflation.” Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,Influx Of Institutional Investors,