While the world continues to float in a relatively high level of uncertainty due to COVID-19, Bitcoin continues to rise. In the interest of keeping abreast of the latest developments related to its’ still institutionally driven growth, we attended Real Vision’s: “Bitcoin in the Real World” event. Just as we did with the Paris Blockchain Week Summit, we’ve compiled the key insights from the RV event to share with you below.
- Institutions turn to other key metrics above the market price.
If you’ve been in crypto for any length of time, then you’ve seen how many people focus on price movements above all else. Still, as time has gone on, the space has become more legitimized in that respect. As of 2020 in particular, we now have quite clear models to use as benchmarks for both Bitcoin’s developing value and when a wider array of institutions may buy-in to said value. At the Bitcoin in the Real World event, Raoul Pal, Real Vision’s CEO, and Mark Yusko, the Chief Investment Officer of Morgan Creek Capital Management, spoke on this topic, pointing out first that institutions “don’t follow price and instead, look to market cap above all else.” They expanded upon this by clarifying that although we’ve seen a few significant moves into Bitcoin from well-known institutions like Square, Paypal, MicroStrategy, and Mass Mutual, looking at Bitcoin’s current market cap tells us just how early it still is in terms of institutional adoption. According to both Pal and Yusko, most institutions won’t even taking on any sort of Bitcoin position until its market cap hits $1 trillion. In summing up this conclusion, Pal said:
“Overall, they think about how it(Bitcoin) fits into existing portfolios.”
That means looking at how it “performs in different market cycles and how it affects the diversification of a traditional portfolio,” amongst other factors. With that under consideration, we can then circle back to our 2020 series on Bitcoin, and say that the current rally is still driven by the idea that Bitcoin is the most compelling store of value to-date. From the onset of the “crypto winter” in 2018 to last week, Bitcoin’s managed an ROI of 212.656% and that’s with its volatility taken into account. Gold, which has been the world’s leading store of value for almost ad-infinitum, managed only a 23.297% ROI over the same period, with inflation taken into account.
Looking at ROI, however, is only the tip of the iceberg.
As Pal and Yusko pointed out, it’s also important to look at how Bitcoin performs as a diversifier or hedge. Back in December 2020, we analyzed Bitcoin’s correlations with bonds, stocks, and gold to attempt to provide a current framework for measuring its’ diversification in a traditional portfolio. Through doing so, we found that Bitcoin is generally negatively correlated with both stocks and gold, while providing far more of a “yield” than bonds, as measured by its’ ROI. Putting these findings together with those of CoinShares in their report titled “Bitcoin’s Role in an Investment Portfolio,” it’s easy to see that 2020 also added fuel to Bitcoin’s status as a hedge against the volatility of traditional assets.
As the data above shows, even as early as September 2020, just a 4% allocation of Bitcoin nearly doubled a traditional portfolio’s Sharpe Ratio. In case you don’t already know, the Sharpe Ratio measures how efficient a portfolio is at generating returns related to the overall risk it experiences.
What the above data indicates is that Bitcoin’s effect on a portfolio’s volatility is more than made up for by its’ even larger effect on a portfolio’s returns. The fact that 5-years of live market-data back up this assertion makes clear that 2020 wasn’t the beginning of Bitcoin’s status as an effective hedge, but a strengthening of it. Even so, as we’ve previously pointed out, the eventual resurgence of the global economy, using interest rates as a benchmark, will be the true test of Bitcoin’s resilience as a hedge.
2. Certain future events point to likely dips in Bitcoin’s price.
None of this is to say, however, that Bitcoin has a clear road to further heights as the year goes on. One of the most compelling insights from the entire “Bitcoin in the Real World” event was that certain upcoming tests for Bitcoin’s growth are already waiting down the road. In a talk titled, “Bitcoin: Then, Now, and Next,” Raoul Pal mentioned the upcoming Coinbase IPO as a major “price hurdle” for Bitcoin, using the rationale that institutions who are new to the space will decide to buy Coinbase stock for exposure to the crypto markets without direct exposure to their powerful volatility. Considering the fact that institutions have driven Bitcoin’s on-going rally through their desire to be exposed to its’ long-term potential growth yields the logical conclusion that this is a short-term and not a long-term roadblock, which Pal echoed.
Using Bitcoin’s price data from February 2020 to now, it’s easy to see that the further this current rally has progressed, the shorter its’ price dips or “bear markets” have become, with the latest being only about a week. Truthfully, however, only time will tell just how much the Coinbase IPO will affect institutional Bitcoin purchases. Whatever the case, the current consensus is that it will have some sort of pull on Bitcoin’s price that will reach beyond the United States market alone.
Following his mention of Coinbase’s IPO, Pal predicted Bitcoin’s next “top” as $100,000, arguing that many current Bitcoin HODLers entered at $10,000 a Bitcoin “with the goal of 10xing their money.” Still, both Pal and Peter McCormack, who served as the moderator, seemed to agree with history that this is nothing more than another prediction to add to the multitude that Bitcoin often proves wrong. If you’ve read any of our past content, then you know that we align ourselves with this view and feel that the industry consensus is for traders and investors to never simply following price predictions as a strategy.
Just before the conclusion of the talk, Pal added that in his mind, that cryptocurrency products and services are, at-large, still geared towards tech-savvy early adopters. For the industry to truly reach the point that mass adoption is a reality across investor classes, Pal suggested that accessing a cryptocurrency wallet needs to be as easy as using your thumbprint or a retina scan, instead of remembering long strings of letters and numbers. To understand just how much effort it will take to reach that point, however, it’s important to think of crypto now as being in the early-days of the internet. With that analogy in mind, it’s possible to conclude, as Pal, Mark Cuban, and others have, that the day when crypto services are truly geared towards the average user is roughly 5–10 years off.
3. Hester Pierce indicated that the SEC plans to introduce further regulatory clarity around crypto in 2021.
It wasn’t only well-known investors and business leaders who spoke at the Bitcoin in the Real World event. Hester Pierce, a current commissioner at the United States Securities and Exchange Commission, also participated in a talk titled, “The Path to Bitcoin Legitimization,” with Real Vision Senior-Editor Ash Bennington and Caitlin Long, the CEO of Avanti Financial Group. The key takeaways from that talk are three-fold.
First, according to Pierce, this year, the SEC plans to provide further clarity relating to “whether crypto assets will be labeled securities or not,” later adding that with this, it’s important to make clear “whether broker-dealers in traditional securities can engage in activities related to crypto assets.” Generally, the answer to this question is no, though with the added consideration that some institutions can get around this with a legal caveat, it’s fairly easy to see why only a few large USA-based broker-dealers currently offer any type of crypto services. Finally, to both of these points, Pierce added that it might be necessary to create a regulatory sandbox for crypto startups of all shapes and sizes, which would amount to a set of rules for crypto entrepreneurs to follow to avoid regulatory crackdowns and work together with regulators to build revolutionary products. This theoretical sandbox would include both the Commodity Futures Trading Commission and the SEC, with the aim of attracting all sorts of cryptocurrency services to USA market through regulatory protection. Despite the general promise of such an approach, however, the finding that regulatory sandboxes can cost $1 million or more brings into question whether such a plan will ever come to fruition.
If there’s one quote that effectively sums up Pierce’s thoughts on the ideal regulatory approach to crypto, it’s this:
“An industry is always healthiest when the way to get in the door is not blocked by a ton of regulation and that is not really (currently) the case with the financial industry.”
Thus, if she gets her way, domiciling a crypto or DeFi-focused startup in the United States may become considerably less difficult as time goes on. It’s important to note that this, of course, hinges on all of the other key decision makers at both the SEC and the CFTC coming to her side of things as well.
4. If there’s one key Bitcoin trading strategy to follow, it’s treating Bitcoin as a store of value.
“The more things change, the more they stay the same.” 2020 was truly a watershed year for Bitcoin in terms of legitimization across the board, but its’ key value proposition continues to remain as relevant as it has always been. Above all, Bitcoin’s a store of value like none we’ve ever seen before, due to its digital scarcity, endless portability, and the fact that it’s always tradable. In other words, Bitcoin is digital gold that can be traded anywhere, any time, in nearly any amount.
Though the RV event offered several new insights on crypto’s leading asset, the consensus amongst all participants’ was that Bitcoin continues to be driven by its status as a revolutionary store of value. Mark Yusko, for example, equated Bitcoin to “the invention of the value over internet protocol” and stated his belief that the ideal path with Bitcoin is to let “Metcalfe’s Law run.” Another way of thinking about this would be to say that when taking on any sort of Bitcoin position, true value is only accrued over the long-term, which the asset’s historical price movements lend credence to. An even simpler encapsulation of Yusko’s idea, which Pal has also echoed time and time again, is “be a HODLer” if you want to truly experience what Bitcoin can do.
Bringing it all Together: What Next?
Here at NBX, we’re dedicated to providing you with the latest major insights on Bitcoin’s path to future, further adoption as they arise. We hope that through the discussion above, you feel more comfortable navigating the current institutional sentiment towards Bitcoin and by extent, its’ developing value-drivers.
Given that the latest Bitcoin news includes Tesla buying-in to the tune of $1.5 billion, it does appear to be possible that 2021 will be the most significant year for Bitcoin yet. If there’s any one metric to watch above all in this respect, it’s Bitcoin’s market cap as we’ve indicated above.
If, for example, it surpasses Tencent in the near future and reaches above the $1 trillion mark, then Pal, Yusko, and others expect the true institutional avalanche of adoption to commence, including more risk-averse institutions like insurance companies and pension fund managers.
However matters turn out, you can always expect more break-downs of industry events from us to help you evolve your investing/trading toolset. With that being said, next week, we’ll be attending MoneyNext’s Blockchain Summit. If you’re attending, you’ll find Ian LeViness, our content lead and industry researcher there, soaking up the event’s insights in preparation for another write-up after it comes to an end. Until then, make sure to follow this blog and our Twitter so that you can be the first to receive all of our latest content and all of the latest developments on NBX’s offering at-large. Finally, if you’re not an NBXer yet, consider signing up via the clickable link below!
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Disclaimer: Content provided does not constitute financial advice. All regulatory opinions related to the SEC that are expressed here are Pierce’s alone as she indicated and may not end up representing the opinion of the SEC.