Growing Institutional Interest in Bitcoin: Over the last year, a lot of important things that haven’t been there before have sprung up in the digital asset market. Taken as a whole, these things make us wonder if institutional Bitcoin adoption is just around the corner. Analyzing the three most crucial aspects in detail.
Regulation, which levels the playing field in the market, is a crucial component. After China’s most recent prohibition on September 24th, the international community turned to the US for reassurance from politicians and authorities over the country’s position on cryptocurrencies. It seemed at first that the new chair of the SEC, Gary Gensler, shared the infamous reluctance of Treasury head Jerome Powell toward digital assets, taking a cautious and non-committal stance about the SEC’s intentions for their treatment.
Regulation in the US
On September 30 and October 5, respectively, Jerome Powell and Gary Gensler announced that they have no plans to outright ban cryptocurrencies, which is great news for the crypto industry and the institutions that support it. When you add in Gensler’s recent remarks about Bitcoin’s potential as a “store of value” and his repeated support for an exchange-traded fund (ETF) based on bitcoin futures, it starts to look like the most powerful regulator in the world is warming up to crypto (within reason).
Since much of the underlying trading happens on unregulated exchanges, the SEC has struggled with the idea of approving Bitcoin ETFs that are backed by physical Bitcoin. Another option is to use a licensed exchange, like the CME, to purchase a futures-based ETF. While this does alleviate worries about market surveillance, products backed by futures are frequently not up to par with spot-based alternatives. Two of the many bitcoin futures exchange-traded funds (ETFs) that have lately been proposed to the SEC have been greenlit. Institutional investors were worried about regulatory pressure on Bitcoin, so this approval was crucial for them.
Adoption
Both supporters and detractors have recently been likening Bitcoin to the internet in 1997. Bitcoin has been growing at an annual rate of 113%, vs the internet’s growth at that time of 63%. Should Bitcoin’s adoption slow to that of the internet, it would still lead to 1 billion users by 2024 and 4 billion users by 2030. With institutions such as Visa, Mastercard, Paypal, BNY Mellon, Morgan Stanley, Goldman Sachs, and JP Morgan to name but a few all reversing their stance against Bitcoin, that isn’t looking likely.
On the 8th of September 2021, El Salvador became the first country to adopt Bitcoin as legal tender, but as newsflow, since then suggests, they will certainly not be the last. More than half of the people have been utilizing the Chivo cryptocurrency wallet, which is much more than the 30% who have bank accounts.
Banking the Unbanked
While 1.1 billion of the world’s population possesses a mobile phone, almost 1.7 billion do not have access to a bank account, according to a new World Bank analysis. For a long time, the idea that cryptocurrency may help the unbanked has been floating around. With $528 billion going to poor nations, the total global remittance market reached $689 billion in 2018, according to the World Bank. The USA, which is home to almost 2.3 million people of Salvadoran heritage, has fifty more commission-free Chivo ATMs than El Salvador.
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El Salvadoreans presently shell out around $400 million annually in remittance fees. We may be seeing the first example of blockchain technology enhancing an antiquated and frequently costly financial system, as new ATMs enable people to transmit quick, commission-free payments across borders. Another country that has declared its intention to legalize Bitcoin and cryptocurrencies is Ukraine. What will be important to observe in Q4 and beyond is the number of dominoes that fall, as Paraguay, Brazil, and Cuba have all entered the fray.
Established Part of Traditional Portfolios
Our most recent survey, which represents 400 billion dollars in assets under management (AuM), shows that institutional investors are becoming more involved. On average, digital assets make up 1.1% of AuM, though this varies greatly across different types of institutional investors. Among those who stated they hadn’t invested, 21% cited regulation as the main reason, followed closely by corporate restrictions at 19%. Investors are still worried about volatility, but thankfully, few think digital assets are lacking in fundamentals.
Macro Environment
Tightening work circumstances (and subsequent pay increases) and rising producer and commodity prices globally are the most prominent indicators of a possible inflationary situation. Investors’ opinions on inflation’s long-term prospects are split. Some believe the impacts will be temporary, while others worry that inflation will pose a threat to economic stability in the long run.
It stands to reason that bitcoin could serve as a safeguard against inflation, at least in theory. Since its price often appears in US dollars and its supply is finite and predictable, economists call it a real asset. Thus, even if the purchasing power of Bitcoin stays the same, it is probable that it will appreciate versus US dollars or any other fiat currency if its quantity increases.
Correlation between Bitcoin and Inflation
According to the numbers, bitcoin is starting to act as an inflation hedge. A current R2 of 0.26 (since 2019) indicates that the relationship is strengthening when looking at price changes relative to inflation across two-year periods since its creation in 2009. By the way, right now, the correlation between inflation and bitcoin is stronger than that between inflation and gold.
An increase in inflation is still possible due to factors such as growing energy costs, a large number of baby boomers planning to retire soon, and the possibility of more wage increases. However, the exact trajectory of inflation over the next five years is still a mystery to us. As a result, we believe that diversifying portfolios with Bitcoin and other real assets is a wise way to hedge against the tail risk of inflation that gets out of hand.
Digital gold Replacing the Physical Version
Although we have gone into great detail regarding Bitcoin’s valuation, it may be worthwhile to review our total addressable market methodology. Bitcoin now accounts for 9.1% of gold’s market share, suggesting that investment fund flows have started to cannibalize gold’s market share.
“A store of value that people wish to invest in, as some would invest in gold,” said SEC chair Gary Gensler not long ago, further solidifying Bitcoin’s status as a legitimate asset. Given the impending escalation of inflationary pressures, it would not be surprising to see the price of Bitcoin reach $100,000. However, this would still only account for 17% of gold’s market value.
As we near the end of the year, several events have the potential to boost prices. These include more regulation, more inflationary risks, more adoption, and better investor appetite. Put simply, these factors are starting to meet all the requirements for more institutional investment in the asset class.
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