Bitcoin’s next bull run?
How do institutional investors prepare for a next Bitcoin bull market
This piece was originally published as editorial of the chainEurope Newsletter #16. chainEurope was founded in Dec. 2017 by Florian Huber, Partner at Signature Ventures, with the aim of connecting the European blockchain community.
Written by Manuel Trojovsky, Signature Ventures
The specter of inflation is haunting the world — again. While macroeconomic data such as consumer price inflation are still inconclusive, gold has jumped to new all-time highs vs. fiat currencies, M2 money supply is skyrocketing and central bank balance sheets have increased to hitherto unimagined levels. What’s more, the Fed has suggested that overshooting its 2% inflation target is acceptable for the time being in light of the economic challenges. The implications of modern monetary policy including money printing and a rapid rise in debt don’t bode well for investors who increasingly find themselves in uncharted waters. Some argue that Bitcoin was created for this environment. And there is evidence to suggest that many an institutional investor is unlikely to miss out on the next Bitcoin bull run.
Bitcoin has often been referred to as “digital gold”. However, the term implies that it is already at the level of gold. The truth is, gold’s market capitalization, estimated at roughly $10 trillion, dwarfs that of Bitcoin at $210bn. Put differently, the total value of Bitcoin currently makes up only about 2% of gold’s value. This inevitably begs the question what happens if investors decided that the ratio ought to be a little higher, say 10% or even 20%. Such a shift could massively tip the scale. Institutional investors receptive to Bitcoin have often dubbed the cryptocurrency as a non-sovereign, emerging store of value. By the same token, Fidelity Digital Assets has referred to it as “an aspirational store of value” in its recent Bitcoin Investment Thesis.
From a portfolio perspective, Bitcoin is arguably a risk asset. On the other hand, it’s an asset with a particularly compelling set of investment characteristics such as hard-cap supply, scarcity, verifiability, and censorship-resistance that are perceived favorably by investors in light of the monetary and fiscal concerns mentioned above. In his analysis of potential inflation hedges, legendary hedge fund investor Paul Tudor Jones put it like this: “the best profit-maximizing strategy is to own the fastest horse”, adding that “my bet is it will be Bitcoin”. In a subsequent interview, he revealed that he has almost two percent of his assets in Bitcoin.
Institutional interest has also been reflected in Grayscales’s rapidly growing GBTC Bitcoin Trust with $4.7bn in AUM — still the only way for most institutional investors to get exposure to Bitcoin. Investor demand is partly underlined by a hefty premium in the order of 20% against the market value of the underlying BTC. In fact, the Bitcoin Trust has been growing so fast that it outpaced the total amount of bitcoins mined during some weeks. On the back of strong investor appetite, the firm has recently launched a TV commercial that runs on CNBC, Fox Business and MSNBC, among others. Elsewhere, both cash-settled bitcoin futures volumes on the Chicago Mercantile Exchange and their physically-settled counterparts at NYSE-owned Bakkt hit all-time highs in August.
Bitcoin has also found its way into corporate balance sheets. MicroStrategy, a $1.2 billion company listed on Nasdaq, decided to diversify their assets to include Bitcoin on the grounds that it “is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash”. The extent of the move — the company bought 21,454 BTC worth $250 million — took many a market participant by surprise. The Bitcoin community on Twitter was quick to point out that given Bitcoin’s 21 million supply cap, less than 1,000 corporate treasurers could pursue a similar strategy, with the actual number being far lower.
Although evidence is mounting that the next bull market might be triggered on the back of institutional interest in Bitcoin - unlike the 2017 rally which was largely fueled by millions of individuals buying Bitcoin for the first time — retail investors are unlikely to take a backseat during the next runup. The appeal of Bitcoin to the millennial demographic, that is, people born in the early 1980s to the early 2000s, is probably on par with gold. In a recent note, JP Morgan strategists wrote that there seems to be a generational divide when it comes to retail investors’ favorite alternative assets, inferring that “the older cohorts prefer gold while the younger cohorts prefer bitcoin.” Case in point: Square’s Cash App swung to another record quarter in 2Q20 with Bitcoin purchases up by 150% against the previous quarter.
From a multi-asset strategy angle, omitting Bitcoin entirely might carry with it a disproportionate risk. This cannot be overstated. In a recent paper on wealth inequality and Bitcoin, Trammell Ventures’ Christopher Calicott concludes as follows: “I would challenge an investor to clearly articulate one’s rationale for no bitcoin allocation, and if that’s the decision, to write it down or discuss the decision with the investment committee”.