Bitcoin Institutional Adoption 2.0

Institutional adoption 1.0 was for institutions. 2.0 will be for their clients.

TL;DR

Bitcoin, as an investment asset, attracted institutions in the last three years, which formed the narrative that accelerated the last bull run. Yet, this first wave of institutional adoption abated for mainly two reasons:

1. We entered the bear market due to one of the most aggressive tightenings central banks have executed to fight inflation.
2. Regulatory unclarity from the governments.

Fortunately, bear markets are for building and expanding the adoption to new circles. Institutions seem to be at the center of the recent adoption narrative again. This time not only will more institutions likely adopt bitcoin, but they are also bringing their clients through their funds and services.

1.0 Narrative: The institutions are coming

The bitcoin institutional adoption narrative was one of the most potent during the last bull run. The narrative was formed around the idea that as bitcoin continued to mature as a technology, grow as a financial asset, and be adopted as a currency, it would be increasingly adopted by institutional players. Furthermore, due to its limited supply and adoption speed, it offers a long-term strategy to hedge against fiat money debasement.

These qualities of bitcoin did attract not only individuals but also larger institutions to enter the space and create a new wave of adoption for bitcoin.

The first wave of institutional adoption.

• Microstrategy: Founded and led by renowned bitcoiner Michael Saylor adopted the bitcoin standard after purchasing $425 million worth of bitcoin in August-September 2020, at the time most of its treasury. So far, the company has purchased 129,699 BTC for a total of almost $4.0 billion valuation.
• Tesla: The company announced in February 2021 that it purchased $1.5 billion worth of BTC to hold it on its balance sheet. It also announced it would accept bitcoin as payment for its products.
• Square (Block): Block published its white paper for bitcoin investment in October 2020, announcing that the company purchased 4,709 bitcoins to add to its balance sheet.
• Galaxy Digital Holding: Although it was not a significant amount (4K BTC), Galaxy Digital Holding’s announcement of bitcoin holdings in June 2020 was another institutional adoption that received attention in the market.
• Grayscale’s GBTC Exchange Traded Product is the largest publicly traded fund by bitcoin holdings, with a total of 636k BTC. From June 2020 to February 2021, it grew its BTC holdings from 354k to 655k, which coincided with the bitcoin price rallying from $10k to $64k.
• Other ETFs. In 2020–2021 various bitcoin-backed ETFs were launched in multiple European countries. These different funds also increased demand for bitcoin by holding as much as 123K BTC at the top of each fund’s holdings between February 2021 and June 2022.
• Other companies. Various companies have also acquired or held bitcoin as a reserve asset. Among them, in addition to the list above, several publicly traded bitcoin miners hold a significant amount as reserves. Other big bitcoin holders are crypto-related foundations (Tezos) and crypto-related VCs (Block One).

The institution’s appetite faded due to regulatory unclarity.

Institutional adoption has faded with a variety of uncertainties in the market. Microstrategy made its most significant bitcoin purchases at the beginning of the 2020–2021 bull run (circles in the chart below). In the case of Tesla, it announced it would not be accepting bitcoin as a form of payment. In addition, they not only paused purchasing bitcoin but sold 75% of its position in Q2 2022.

Finally, the bitcoin holdings of different funds (including GBTC) ceased to grow since May 2021.

Bitcoin: Fund Holdings

A lack of regulatory clarity was one of the most significant factors that halted the adoption momentum. SEC and CTFC’s relentless fight over the power of oversight of digital assets has not been resolved yet. Nevertheless, the Biden administration’s Executive Order (March 2022) and MiCA by he European Commission aim to pave the way for regulatory clarity, which has already attracted traditional finance institutions discussed below.

Have institutions’ interest in bitcoin faded completely?

Bitcoin Institutional Adoption 2.0: Providing access to clients

What is the new narrative? Why is it different from the first one?

Most institutions adopted bitcoin as an investment vehicle only for them. Microstrategy, Tesla, and the other companies added bitcoin to their balance sheet. The core of this new narrative is that Bitcoin gained institutional clients in the last few years, but now it will be available to their clients. In other words, traditional finance institutions will make bitcoin available for many of their clients through their own financial services under their umbrella. Providing access to hundreds of millions of clients can further advance bitcoin adoption as an investment asset by making it easier for these clients to get exposure to it.

The Executive Order’s neutral stance on bitcoin, supported by SEC’s accepting the bitcoin futures ETF in October 2021, encouraged some financial institutions to enter the space with their investment products.

• Fidelity announced that it would launch a product in which people will be able to invest in digital assets (especially bitcoin) in their 401(k). Fidelity is the largest 401(k) service provider in the United States by total assets ($2.0 trillion). Providing access to clients who can offer bitcoin as an alternative investment vehicle for their employees will open another vein feeding the adoption movement.
• Blackrock, the world’s largest asset manager, announced a partnership with crypto exchange Coinbase to “provide Aladdin clients access to crypto trading and custody via Coinbase Prime.” According to Coinbase, this will “create new access points for institutional crypto adoption by connecting Coinbase Prime and Aladdin.” Coinbase Prime is the exchange’s institutional solution (13,000 institutional clients), and Aladdin is Blackrock’s operating system for investment professionals.
• Citadel, Charles Schwab, Fidelity, and others. Citadel Securities, Fidelity Investments, and Charles Schwab have recently announced plans to launch a new cryptocurrency exchange called EDX Markets. The exchange will serve retail and institutional investors. The exact timeline of the launch hasn’t been announced yet.
• Nasdaq. The exchange just announced it had launched a new business unit called Nasdaq Digital Assets that will focus on providing institutional-grade solutions in terms of custody and liquidity.

Conclusion

Institutional adoption 1.0 that fueled the bitcoin bull run in late 2020 stemmed from the fact that institutions were adding bitcoin to their balance sheet; hence by institutions and for institutions. The new narrative will likely change the focus toward the clients of new institutions who would not only add bitcoin to their balance sheets but also make it accessible for their clients.