[Insight] The ‘Institutional Stock Trend’ Has Begun
Bitcoin has shown a steep price rise since the end of the last year. Basically, we can say it is a ‘liquid stock trend’ created by the power of the money that the central government and the central bank of each country released unprecedentedly in order to respond to the COVID-19 pandemic. If we check the money flow surrounding Bitcoin, traders of most importance in the market are institutional investors. Thus, we can say it is a kind of ‘institutional stock trend’. In this context, the word ‘institution’ mainly refers to the financial firms that are managing not only their own capital but also the money of the customers, such as banks, stock firms, insurance companies, and asset management companies, etc.
Financial firms worldwide represented by Wall Street used to avoid Bitcoin. They did not give a glance to it, even in 2017 and 2018, when Bitcoin’s price was rising. Most importantly, the financial authorities themselves were giving a hostile look to Bitcoin and other virtual assets. Plus, the price volatility is huge, and the hedging method is not very effective, making it much more difficult to file in Bitcoin into customers’ portfolios.
And then the COVID-19 pandemic came, resulting in a mass release of money because of the necessity of non-contact payments. This caused some worries related to the depreciation of the currency and inflation, thus bringing Bitcoin, which is called ‘Digital Currency’ or ‘Digital Gold’, to the main stage. Thanks to those interests, Bitcoin’s price has risen, and institutional investors slowly and carefully began to purchase and keep them in storage.
Since the latter half of the last year, legendary figures in the hedge fund business such as Paul Tudor Jones and Stanley Druckenmiller started to purchase Bitcoin with their own funds, and other hedge fund companies followed in their footsteps. Skybridge Capital, one of such hedge fund company, and the insurance company MassMutual have invested USD 182 million and USD 100 million in Bitcoin, respectively. Also, Guggenheim Partners, a private equity fund (PEF) company, has invested up to 10% of its USD 5 billion funds in Bitcoin.
While the individual investors who have experienced heavy losses during the market crash in 2018 are hesitating, such a sizable sum of money invested by the institutional investors has contributed greatly to raising Bitcoin’s price in a step-like way. So, it seems it is right to say this phenomenon as the ‘institutional stock trend’.
However, after Bitcoin’s price has risen over USD 40,000, it shows a liquid stock trend for over 2 weeks, heading towards the adjustment step. Bitcoin’s price had indeed risen to a certain high level. But since there were not so many institutional investors who have retreated from the market, this reappearing rollercoaster-like fluctuation must have disappointed the investors themselves. It is right to say that the current trend is ‘institutional stock trend’, but the reason for this situation is because this ‘institutional stock trend’ did not show enough progress.
We can see that by comparing it with the stock market. Currently, the importance of the institutional investors in the New York stock market is nearly 70%. Even in the Korean stock market, institutional investors are holding more than a 30 to 40% ratio. On the contrary, according to the estimation by Goldman Sachs, the ratio of institutional investors in the Bitcoin market is around 1%. That is to say, it did seem to be an ‘institutional stock trend’ because there were few existing institutional investors in the market.
Well, of course, the actual ratio of the institutional investors can be much higher than this. It is known that many institutional investors have no wishes to expose their current position or trying to avoid causing Bitcoin’s price rise by purchasing them in the market are using the Over-the-Counter (OTC) market as their major trading route. According to Circle, a digital asset financial platform, the trade volume in the OTC market is 2 to 3 times higher than that of the market exchanges since the end of last year. In other words, the purchase trend of the institutional investors is not the direct reason for the price rise of Bitcoin.
Right now, the indirect investment products available for institutional investors are scarce, except for the Bitcoin Trust of Grayscale. We need more of such products for indirect investments. And ultimately, we need more institutional investors who can trade Bitcoin directly. Until then, the institutional stock trend with high volatility will continue.
In the end, the solution for Bitcoin to completely get rid of the volatility will be the coming of more institutional investors into the market. Currently, the market cap of Bitcoin is USD 600 billion, while the market cap of the gold is weighing USD 3 trillion, 5 times higher than Bitcoin’s. Furthermore, the ratio of institutional investors in the gold market is over 30%. If Bitcoin wishes to become an investment asset that can replace gold, its ratio of the institutional investors should go up at least to the same level of the gold market, which means there is a long road ahead.
According to the recent reports from JPMorgan, it forecasted, “The current number of enthusiastic investors can grow further. We cannot deny the possibility of the growth of Bitcoin’s price can reach USD 50,000 to 100,000.” However, JPMorgan also added, “Such high price (achieved by enthusiastic investors) will not last long.” Though, if the ratio of institutional investors in the Bitcoin market can grow to the level of the gold market, JPMorgan forecasted that Bitcoin’s price can go up to USD 146,000.
JPMorgan said, “It will be unrealistic for institutional investors to expect Bitcoin to be incorporated into the portfolio at the same level as that of the gold unless the volatility of Bitcoin is reduced.” It also predicted that “It will take few more years until the Bitcoin’s volatility reduced to the same level of gold.” It seems we need more patience to wait for that day to come.
*This research and analysis document has been prepared for the purpose of providing information that can be used as a reference based on our reliable data and information but we cannot guarantee its accuracy or completeness.
*The document has reflected the individual’s opinion and it may not be consistent with the company’s official point of view.
