Bitcoin prices powering through because of institutional investment

The past few months have seen a steep rise, fall, and then again a rise in the Bitcoin market. However, unlike the 2017 retail frenzy, this time it was driven by institutional investors. The clearest sign of Bitcoin’s institutional adoption is the growth of indirect investment.

THE INDICATORS

The Grayscale Bitcoin Trust is a fund which allows accredited investors to invest in bitcoin. It recently reached a 10-month high, with approximately 1.4 billion USD in assets under management. Grayscale’s GBTC product basically means that the institutional investors can buy bitcoin in a conservative financial setting (the fund is available through brokerage accounts and provides regularly audited financial statements). Retail investors can also purchase shares in the fund but often pay a premium, in excess of 30%.

Trading experts on the sidelines of Consensus, a cryptocurrency industry conference held in New York recently, also pointed to an additional reason for bitcoin’s comeback: The New York attorney general hasn’t sunk Bitfinex, one of the largest crypto exchanges.

Many traders bet that bitcoin would face a disaster after the AG, Letitia James, revealed that her office is investigating Bitfinex’s parent company, iFinex. The firm supposedly shifted hundreds of millions of dollars to Bitfinex from an affiliate. James’s office also suspects the company may have defrauded investors. But the development of the legal process has been slow. In the meantime, Bitfinex raised $1 billion (in just 10 days) through an initial exchange offering (IEO), which is a minor modification of the initial coin offering (ICO) phenomenon that took the market by storm 2 years ago.

Betting against bitcoin was popular, at least a few weeks ago. It was a “crowded short,” explained Dave Weisberger, CEO of CoinRoutes, an order-routing service for cryptocurrency trading. But when the market didn’t dive as expected, traders with short positions rushed to cover themselves, buying indiscriminately in bitcoin’s spot market. “Short covering is often price insensitive,” remarked Weisberger.

ORTHODOX FINANCIAL INSTITUTIONS ARE POSITIVE

JPMorgan Chase (JPM) also thinks the Bitcoin (BTC) industry has changed considerably since 2017, citing an increase in institutional interest, as reported by Bloomberg. The publication quoted a report led by the managing director of global market strategy of JPM, Nikolaos Panigirtzoglou, in which researchers examined recent phenomena surrounding cryptocurrency exchanges.

The Report summarised it as:

“The overstatement of trading volumes by cryptocurrency exchanges, and by implication the understatement of the importance of listed futures, suggests that market structure has likely changed considerably since the previous spike in Bitcoin prices in end-2017 with a greater influence from institutional investors.”

Fidelity Investments released the results of a new survey and study recently. It was based on institutional investors’ crypto-asset investment strategies. Noting a significant rise in interest among institutions, the company wrote:

Institutional engagement is here … institutional investors are overwhelmingly favorable about the appealing characteristics of digital assets. Nearly seven in ten respondents cited certain characteristics of digital assets as appealing

The survey found 47% of respondents “appreciate that digital assets are an innovative technology play” while 46% were attracted to the digital assets’ low correlation to other assets. Meanwhile, 27% liked their high upside potential and 25% favoured their decentralization. Among respondents, financial advisors (74%) and family offices (80%) view the specifications of digital assets most favourably.

The survey was conducted between November 26 last year and February 8 by Greenwich Associates on behalf of the Fidelity Center for Applied Technology. The specifications of participants were 441 U.S. institutional investors, including pensions, family offices, crypto and traditional hedge funds, financial advisors, endowments and foundations.

Fidelity Investments is recognised as one of the world’s largest financial services providers. The company claims to have more than a whopping $7.3 trillion in client assets under administration. One of its subsidiaries, Fidelity Digital Assets, offers a platform for securing, trading and supporting digital assets.

5 YEAR GAME-PLAN

Fidelity’s study shows that “Institutional investors are finding appeal in digital assets and many are looking to invest more in digital assets over the next five years,” elaborating:

About 22% of institutional investors already have some exposure to digital assets, with most investments having been made within the past three years … Four in ten respondents say they are open to future investments in digital assets over the next five years.

47% of the respondents believe that digital assets have a place in their investment portfolios. 32% see them as part of an alternative asset class, while 15% thinks they should have their own independent asset class. Among the 47%, 72% would like to buy investment products that hold digital assets, 57% would buy crypto assets directly, and 57% would buy investment products that hold crypto companies.

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