Institutional Waves of Money Flowing into Bitcoin
in Bitcoin (BTC)
Institutional interest in Bitcoin is accelerating at an eyebrow-raising rate.
In this article, we’ll look at three different examples of how institutions are adopting Bitcoin. Keep in mind, everything we’re about to cover is only from October of 2020.
Fidelity and Bitcoin
This Tweet from Ivan on Tech is an excellent example of the current narrative: Fidelity has recommended that institutions invest 5% of their balance sheet into Bitcoin. This narrative is slightly misleading, however.
The Fidelity report methodically lays out the case for why institutions may want to invest in Bitcoin. For example, the following section from the report shows Bitcoin’s growth potential.
“Bitcoin has a $197 billion market cap (as of October 7, 2020). Bitcoin is a drop in the bucket compared with markets bitcoin could disrupt (e.g., stores of value, alternative investments, settlement networks). - If Bitcoin were to capture 5% of the alternatives market as measured by CAIA, that would equate to an incremental $670 billion growth in its market size. If it were to capture 10%, that would expand its market size by $1.3 trillion.”
Here’s where it starts to get interesting. If you’ve been keeping track of recent events, you’ll have heard that the publicly-traded company MicroStrategy invested $425 million, nearly 100% of its balance sheet, into Bitcoin. Since then, Michael Saylor, the CEO of MicroStrategy, has given a dozen or more interviews on all of the major Bitcoin podcasts.
Saylor has talked about buying Bitcoin as a hedge against inflation due to central bank money printing. He’s discussed how Bitcoin can be a safe haven in the event of a global financial system meltdown and how Bitcoin is the world’s best hard money. In other words, Saylor has covered most of the key talking points from the Bitcoin community. He has been speaking “Bitcoin language.”
Raoul Pal, a huge BTC bull and “irresponsibly long” Bitcoin, has come out with the contrarian view that Michael Saylor is not helping Bitcoin by saying all of these things.
Pal’s point is that to convince other corporate treasurers to put BTC onto their balance sheet, it’s necessary to speak “corporate treasurer” language, not “Bitcoin language.”
For example, Pal suggested addressing,
- The fact that Bitcoin is uncorrelated (in the long run) to other assets
- How a 2 to 3% Bitcoin allocation could fit into a broader investment portfolio
- How Bitcoin reacts to flat or negative real treasury yields (it does well)
These are ideas that a corporate treasurer can present in a meeting, rather than bringing up money printer go brrrrrr slide or some meme about Jay Powell.
The Fidelity report is exactly what Raoul is talking about. It’s a report which presents a Bitcoin investment thesis in a way that a corporate treasurer can understand. Return enhancement and portfolio diversification, annualized volatility and risk hedging, etc.
The entire article is incredibly valuable because it’s a bridge between institutional investors and the Bitcoin community, and hopefully, the long-term results will be more corporations recognizing the value of Bitcoin.
Stone Ridge: New York investment firm buys 10,000 BTC
We’ve recently learned that the asset management company Stone Ridge has purchased 10,000 BTC, equal in value to about $115 million! They’re currently custodying the Bitcoin with NYDIG.
New York Digital Investment Group (NYDIG) is a spin-off of the asset management company Stone Ridge. In 2017, Stone Ridge began to receive inquiries from their clients who wanted to invest in Bitcoin. Sensing an opportunity they created NYDIG, a company that can buy Bitcoin and custody funds, all in one place.
Stone Ridge’s purchase of 10,000 BTC is similar to MicroStrategy’s decision to convert its balance sheet to BTC. In this case, Stone Ridge believes that because governments are so indebted, they’re going to have to print their currencies which will lead to inflation.
Against that backdrop, Bitcoin is a hard money asset with a strong network effect that sets it apart from other coins. This is just another example of a company using Bitcoin to hedge their balance sheet against inflation.
Grayscale Experiences Record Inflows
Anyone who has been involved with crypto for a while will know about Grayscale, an investment product that makes it easy for institutional buyers to invest in Bitcoin. Some people have called it a backdoor Bitcoin ETF. Until a Bitcoin ETF is approved, Grayscale’s product is really the only game in town.
According to Grayscale’s 2020 Q3 report, “Grayscale recorded its largest ever quarterly inflows, over $1.0 billion in 3Q20, making it the third consecutive record-breaking quarter. Year-to-date investment into the Grayscale family of products has surpassed $2.4 billion, more than double the $1.2 billion cumulative inflow into the products from 2013-2019”
Institutions have invested more in Grayscale in the last nine months than in the previous six years combined. There has been $720 million invested in Grayscale’s Bitcoin fund in the last three months.
This buying is actually more bullish for Bitcoin’s long term price than many people understand. There is a joke in the crypto community that Grayscale’s Bitcoin product is like Hotel California.
"We are programmed to receive
You can check out any time you like
But you can never leave"
The way that the Grayscale investment product is set up, Grayscale can only purchase Bitcoin, they can’t sell it. What this means is that Grayscale is slowly accumulating a treasure chest of Bitcoin that isn’t available on the market, it’s locked up for good (or for as long as the Grayscale investment vehicle exists).
Some people say this isn’t good for BTC and they wish that Grayscale didn’t own so much of it. That’s a debate for another day though. Whether it’s good or bad, the fact that Grayscale owns so much Bitcoin, and continues to add more to their fund, reduces the floating supply which will force prices higher as demand picks up.
The Next 18 Months
MicroStrategy, Square, record inflows into Grayscale, Fidelity lays out its Bitcoin investment thesis and Stone Ridge buys more than $100 million of BTC — this is just the beginning of the institutional money that’s coming into Bitcoin in the next few years.
The short term effect of all this buying is good, as Bitcoin’s price goes up. However, what’s really exciting is the long term potential. By making it acceptable for companies and large financial institutions to get involved with Bitcoin, these early adopters are laying the foundation for the next great bull market in Bitcoin.
It won’t happen overnight, institutions are slow to move, but when it comes it’s going to be big… Based on what we’re seeing now, 2021 is shaping up to be a huge year for BTC and the crypto industry as a whole.
Information provided is for informational purposes only and should not be considered financial advice. Investing in crypto assets is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Past performance is not indicative of future results.