Institutional money arrives for Bitcoin
The influx of institutional investment into Bitcoin is something crypto fans have been predicting for years now. However, for reasons that have never been entirely clear to many in the space, it’s often seemed a distant dream, like a bus on the horizon that’s scheduled to arrive, but doesn’t seem to be moving any closer.
Until now, that is. It feels like not a day goes by at the moment without another industry giant announcing that they’re converting their cash reserves into bitcoin. From FinTechs to business intelligence leaders, companies across a range of sectors are making the leap.
And their ranks only appear set to swell further. A recent survey commissioned by crypto asset insurance company, Evertas, surveyed 50 institutional investors across the US and UK, with more than $78 billion in assets under management between them. Of these, 26% said they believe that pension funds, insurers, family offices and sovereign wealth funds will raise their stakes in cryptocurrency “drastically”.
The numbers may still be relatively small, but they’re growing fast. The question is, why now? Does it really help bitcoin in its quest for mass adoption? And is it necessarily a good thing?
A trickle becomes a flood
Payments giant Square is perhaps the best-known among the recent glut of big money institutional investors. In October, they announced that they had bought approximately 4,709 bitcoin for around $50 million.
Square has a market cap of $81 billion and has long allowed users to buy, sell, and transfer bitcoin through its Cash App. Its bullish stance is largely down to founder Jack Dorsey, who also co-founded Twitter. His pro-Bitcoin views are well documented on his own platform and beyond, and he can often be found promoting the cryptocurrency.
While Square may be the best-known by the public, though, it’s arguably business intelligence leader MicroStrategy which has really stood out this year.
In August, they made bitcoin their primary treasury reserve asset, buying 38,250 BTC at an aggregate purchase price of $425 million. Its CEO Michael Saylor is probably even more bullish than Dorsey. You can’t shut the guy up about it. To be fair, at time of writing, the move has netted them an unrealised profit of over $163 million and counting. Would you shut up if you were him?
#Gold delivers financial freedom via horse, buggy, & stagecoach. #Bitcoin is a crypto-powered warp drive. When the monetary mass transit system of the modern state breaks down, we might go back to an economy powered by horses, donkeys & mules, but I doubt it.
— Michael Saylor (@michael_saylor) November 24, 2020
They aren’t alone either. Asset manager Stone Ridge Holdings Group has now made bitcoin their primary treasury reserve asset, too. UK FinTech leader Mode recently raised £7.5 million and has allocated up to 10% of its cash reserves to purchase bitcoin and adopt it as a treasury reserve asset. The list goes on.
What started as a trickle is becoming a river.
Grayscale dominating the market
You can’t talk about institutional investment without mentioning the biggest bull of them all – asset management giant, Grayscale.
The Grayscale Bitcoin Trust is famous for being the first institution to put Bitcoin adverts on TV. Its famous Drop Gold adverts were particularly well received – Grayscale brought in $217 million within a week of the ad launch.
Today, Grayscale has over 500,000 BTC under management at time of writing. That’s almost 3% of the current circulating supply.
10/16/20 UPDATE: Net Assets Under Management, Holdings per Share, and Market Price per Share for our Investment Products.
— Grayscale (@Grayscale) October 16, 2020
The majority of this, the company says, is held on behalf of institutional investors. In a recent interview, Michael Sonnenshein, the managing director of crypto investment firm Grayscale Investments, LLC (“Grayscale”) explained:
“I’d say overwhelmingly our inflows into the products where we actually are directly raising assets is probably over 80% these days coming from institutional investors; so I’d say we’re talking primarily about non-crypto hedge funds, but that also means that we serve a whole swatch of high net-worth individuals, family offices, other types of institutions, financial advisors, RIAs, and then because some of the Grayscale products are also publicly quoted, we also serve really any investor that has access to the public markets where they can trade in Grayscale products in their brokerage accounts, IRA accounts, etc.”
There are a number of reasons companies are choosing now to go into Bitcoin. For Square, its CEO, Jack Dorsey’s beliefs have been well-known for a long time now. His belief in its promise is fundamental. He summarised these in a recent interview with Joe Rogan:
“I believe the Internet will have a native currency and I don’t know if it’s Bitcoin. I think it will be [Bitcoin] given all the tests it has been through and the principles behind it, how it was created. It was something that was born on the Internet, was developed on the Internet, was tested on the Internet, [and] it is of the Internet.
“We would love to see something become a global currency. It enables more access. It allows us to serve more people. It allows us to move much faster around the world. We thought we were going to start with how you can use it transactionally, but we noticed that people were treating it more like an asset, like a virtual gold, and we wanted to just make that easy, just the simplest way to buy and sell bitcoin.”
For others, however, it’s really recent events that have prodded leaders towards the realisation that Bitcoin is the future. Let’s go back in time a bit to December 2019. There were less masks, people stood a lot closer together, and there was a lot less institutional money invested in bitcoin. What’s changed? Well, in all three cases the answer is simple – COVID-19.
The financial system was pretty much the same back then. Governments printed a lot of money. Cash was depreciating in value every year. But events in 2020 have shone a stark light on this. With the world gripped by an economic crisis amidst the spread of COVID, governments began printing money at record rates, further depreciating the value of fiat currencies across the world.
MicroStrategy CEO, Michael Saylor summed this up succinctly with his description of his company’s cash holdings as ‘an ice cube that’s melting’. He explained that before the COVID-19 crisis, the Virginia-based company had about $500 million, mostly invested in short-term U.S. government securities. When yields tumbled in the wake of the pandemic, Saylor started to question that conventional strategy.
He estimates that so-called asset inflation will surge to more than 20% a year, eroding purchasing power. Saylor explained: “Once the real yield on our treasury got to more than negative 10%, we realised that everything we are doing on P&L is irrelevant.”
Sonnenheim agreed with this explanation, noting:
“When things go bad, investors are looking historically at things like bonds and gold but now that subset of investments you might choose when things go bad include assets like Bitcoin and I think especially in the wake of how government intervention has come into the fold in the wake of the pandemic, you’ve just seen this unlimited fiscal stimulus being injected into the financial system.
“When you think about that it’s causing a lot of investors and a lot of the conversations we’re having with investors to revisit some of the core attributes of digital currencies like Bitcoin that do in fact have a verifiable scarcity to the amount of Bitcoin that will ever be.”
The increasing number of other companies following his lead suggest that other CEOs are buying into his logic, and it’s highly unlikely that they’ll be the last.
Why it’s good
The influx of institutional investment is hugely positive for a number of reasons. High among these is the stature of those involved. Anyone buying bitcoin is a good thing, but such well-established and well-respected entities placing such large bets on its future is a huge show of confidence in both its potential and its status as a store of value.
Bitcoin has, in the past, been called a scam and criticised as a tool used by criminals. This impression, wrongly, still lingers for some. Can anyone really still hold that impression if the likes of PayPal and Square are entering the space, given the huge volume of due diligence they will have done and the complex patchwork of regulations they have to abide by?
The belief shown by these large corporations suggests that the industry as a whole is maturing. CEOs have clearly reached the conclusion that the regulatory framework they need is now strong enough for them to feel confident enough to get involved. Bitcoin is no longer a fringe case. The work they’re doing paves the way for other high-net-worth individuals and smaller businesses to invest their liquid assets into cryptocurrency.
Equally, there are issues. For one, there’s an element of centralisation that some have taken against. They argue that bitcoin was built for the people, and companies buying up such huge quantities goes against the core tenets of Bitcoin and the philosophy it was built on. It simply doesn’t leave much for the rest of us if big companies all jump in and buy up millions of bitcoin.
Ultimately though, there’s still plenty of bitcoin to go around. Bitcoin is infinitely divisible so you can buy as much or little as you want. They’re also not here yet. The number of institutions is still a trickle at the moment – though it’s a trickle that’s growing fast. So get in while you can. It’s never too late to be early.