Bitcoin isn’t going to zero — that’s a big deal
Key thought leaders and influencers across the traditional finance world have clearly formed a view that bitcoin, and the digital asset sector it leads, is here to stay
The traditional investment and financial services world has had a consensus view, since they started having a view, that bitcoin, and the digital asset sector as a whole, will one day be worthless (assuming [rat poison]² is worthless). The only debate has been about "when", not "if". This lack of belief in bitcoin’s sustainability is one of the key reason no major institutional investor or investment bank has historically invested any significant capital (financial and reputational) in the sector.
So, will this change? We think there are four key, sequential developments over the last six months that have, slowly, moved broader consensus on the digital asset sector’s longer-term sustainability and will continue to do so. Combined, they present a potential fundamental change in the risk/reward spectrum for the sector moving forward:
- December 2017 — The launch of bitcoin futures contracts by the CBOE and CME: Whilst the launch of futures coincides with the current all-time-high in bitcoin, over the longer-term it is our expectation that it will be seen as a key milestone in bitcoin’s, and the digital asset sector’s maturation. The regulatory and internal hurdles overcome to launch even a cash-settled bitcoin futures contract are immense and it is not a project sophisticated, highly-regulated exchanges undertake for an underlying asset they believe has no long-term future;
- April 2018 — Soros Funds commence trading digital assets: The publication of articles confirming that Soros Funds had internal approval to commence trading digital assets provided the second recent validation of investment credibility. A fund overseen by one of the most respected investors of our times would not waste its resources investigating and building capacity to invest in an asset with no future;
- April 2018 — Goldman Sachs and Morgan Stanley launching bitcoin internal trading operations and, potentially, agency desks: Confirmation from both firms, the two most prestigious on Wall Street, that they will be launching bitcoin trading operations is the third-strike to the thesis that bitcoin is going to zero. Investment banks do not launch new businesses lightly and the work required to get to the point they appear to be at, with both internal compliance and regulatory stakeholders, should not be underestimated. It is now almost inevitable that their major trading peers, such as Citi, BAML and J.P.Morgan will need to enter the market to ensure they don’t forfeit a client and trading opportunity to their rivals; and
- May 2018 — ICE investigating a bitcoin exchange: in our opinion the most fundamental development was delivered this week with news that ICE, the owner of the NYSE, is looking to launch a physical swap market in bitcoin. The world’s most influential, regulated exchange operator is potentially opening a trading platform in physical bitcoin — the immensity of this development should not be underestimated. If achieved, for the first time there will be a bitcoin price, for physical delivery, determined on a regulated exchange with this regulated exchange also providing custodial services. Combined, this removes two of the last remaining barriers to traditional investor participation in the sector and increases opportunities to launch broadly distributed investment products such as ETFs.
In the space of six months two of the world’s largest futures exchanges, one of the most respected hedge fund operators, the two pre-eminent investment banks and the most prestigious equities exchange operator have all invested time and capital in building bitcoin trading knowledge and infrastructure — thought leaders in the traditional financial sector now agree Bitcoin is not going to zero.
Is that a big deal? We think it is, for two key reasons:
- Traditional merchants, custodians, research analysts, payment systems developers, banks and many other participants in financial and consumer markets are more likely to invest resources in digital asset-related services once they believe it has a long-term future. It is our view that as the ecosystem around digital assets grows, so does its value to end-users and investors; and
- If the downside of an investment is not total loss then the risk reward profile of that investment, and the potential leverage you can apply to it, materially changes. This will see the number of participants and liquidity in digital asset markets improve which, all else being equal, should see an increase in investor demand
Does this mean bitcoin will recommence its pre-Christmas logarithmic growth path? In our view, no, but it does mean that the fundamentals underpinning the digital asset sector’s valuations continue to improve and that can only be a good thing.