How Much Institutional Money Is Really in Bitcoin?
Grand claims have always existed, but do they stand up under scrutiny?
I’ve been in the crypto space for some years now and I’ve lost count of the number of times someone has claimed ‘institutional money is moving in.’
In fact, I remember distinctly discussions between TV pundits during the short-lived price boom of late 2017/early 2018 that it was ‘imminent’, helping to fuel the frenzy of retail investors.
But it never came. There were just too many problems with storage, security, regulations and the whole understanding of the asset class itself. Not only that, but some of the institutions themselves could actually stand to lose if Bitcoin gained traction and could not be seen to support it in any way.
Yet the stories kept coming, even as the price fell. When the crypto winter started to bite, rumors and stories still trickled through of the next big move.
I remember articles even quoting actual figures as high as $200-$600 million dollars a week being poured into the nascent market place, apparently eager to capitalize on the possible high returns to come. The trouble is, market volume and price movements seemed to contradict these claims. Where on earth were these numbers coming from?
To say I was skeptical would be an understatement. They just seemed made up.
In an effort to find out the truth, I carried out a little informal research with friends in the financial services industry at the time. It wouldn’t give me anything definitive, but it would give me an idea of what sort of communication they had been seeing internally about it and what the general ‘feel’ of the subject was.
Unsurprisingly, but inevitably, the results were either indifferent, lackluster or dismissive. Some even thought I was joking.
Something, somewhere, didn’t add up and, as the SEC (Securities and Exchange Commission) in the USA continued denying applications for Bitcoin ETFs (Exchange Traded Funds) whenever they were presented, my conclusion is that any buying into Bitcoin by institutions was overblown if it existed at all.
So what’s the truth … and what happens next?
Some institutional money IS already here … indirectly anyway
Whilst there are no ETFs in the US, despite the continued efforts of the Winklevoss Twins, VanEck and SolidX and Cboe Global Markets, many think it is only a matter of time before the SEC’s objections are adequately dealt with and one is approved, perhaps even within the next couple of years. I personally agree with this and wrote about it as one of my 8 Bitcoin predictions for the next five years.
In the meantime, there was one forward-thinking company who found a workaround very early on, finding a route that did not require SEC approval to create a fund involving Bitcoin as far back as 2013. However, it didn’t start publicly trading until 2015 when it obtained FINRA (Financial Industry Regulatory Authority) approval to do so.
That fund is now called the Grayscale Bitcoin Trust (GBTC). It is unique because it still remains the only physically-backed fund available for investors to trade via OTCQX, an over-the-counter exchange.
Initially, under the Alternative Reporting Standard for companies, it was not required to register with the Securities and Exchange Commission (SEC), but in January 2020 Grayscale obtained the status of reporting company from the SEC anyway for all ten of its different cryptocurrency investment products in response to ‘growing demand’ from investors.
The fund distinction is clever. It actually holds the Bitcoin safely in storage, currently some 285,000 as of February 2020, and sells ‘shares’ of the fund value to investors who can then trade these independently between themselves, a little like company stock. The Bitcoin itself never moves and is, presumably, in cold storage somewhere.
For traders who don’t want the risk or hassle of strong Bitcoin directly, it is a simple solution that allows (almost) direct investing in Bitcoin through approved channels in the same way as virtually any US security. It can be traded by a brokerage firm and can even be made available through tax-advantaged accounts such as IRAs and 401(k)s.
However, this convenience and compliance comes at a cost.
The fund is expensive, at 2%, and the premium on the shares rarely drops below 20%. But the reality is that until something changes in the market place, this is will remain in place. If you’re looking to invest in a Bitcoin fund through official, approved and regulated channels, you either do it here, or you don’t.
That said, Grayscale reported an influx of over $600 million in 2019, which is impressive when you consider this was more than everything between 2013 and 2018 combined. Michael Sonnenshein, the managing director of Grayscale said in January:
“If the persistent question is ‘where are the institutions investors in crypto?’ the answer is that they’re here and showing up in a meaningful size.”
It’s a brave statement, but even if we agree, we can only really say this is ‘on the periphery’ of investing in Bitcoin. That said, with $2.7 billion of assets now under management, it’s not an insignificant amount of money.
There are other options that have attracted some institutional funds, but these are also on the edge of being directly involved, most notably futures contracts, such as the ones offered by CME Group. These require no physical allocation of Bitcoin itself, being settled instead off the cash price at the expiration of the contract.
Bakkt’s version, a partnership between ICE (Inter Continental Exchange), Starbucks and Microsoft (among others), also has a cash-price based offering, but it recently launched a physically-backed version settled in actual Bitcoin held in a secure ‘warehouse.’
There was initial excitement about this, especially as the tracking twitter handle (@bakktbot) started reporting enormous daily volumes, but these volumes later transpired to be for the cash-settled version rather than the physically backed version which, so far, has been slow on the uptake.
To put it into context, although the fund was regularly dealing with tens of millions of dollars daily on the cash settlement side, the actual number of physically delivered Bitcoin in October and November 2019 was just 32. That was around $256,000 at the time, the financial sector’s equivalent of small change found down the back of a sofa.
Clearly, the physical involvement with Bitcoin for institutional investors is still something that scares them.
What happens next?
If you’re an institutional investor managing a fund and you’re interested in Bitcoin, your options still remain very limited right now.
First, your organization will almost certainly not want to run the risk of creating a wallet and storing it securely. And, since the technology and application is still so young, there are still question marks about whether it’s worth it. And that’s aside from the regulatory problems.
Therefore, your only options remain the ones listed above which, for whatever reason, may not be appropriate for them or their clients.
Second, for many people, the idea of investing in Bitcoin is still abhorrent for the usual (and oft-quoted) reasons of volatility, fears of market manipulation and the fact that asset class is still finding its feet. It takes a brave, determined and risk-loving asset manager to put his money where his mouth is in those circumstances.
This last reason is almost certainly the bigger problem of the two in my opinion. After all, Bakkt has all but solved the storage problem for this market sector and, even if it hasn’t, it’s insured with a $125 million policy. Many of the barriers that were previously in place are simply no longer there.
So, what is everyone waiting for?
The simplest explanation is that we’re waiting for Bitcoin itself. Every day the network grows in strength, adoption increases, hash rates rise and the number of wallets creeps up, but the reality is that Bitcoin’s capitalized value is dwarfed by the funds under management. It’s still too unpredictable, too unregulated, too divisive and, frankly, too early for most fund managers to do any more than dipping a toe or put some of that ‘sofa change’ into it.
Put yourself in their shoes — access to well established, well regulated, insured, backed and recognized established funds that you fully understand and have known points of contact to trade-in OR put your client’s money into something that sits completely outside these boxes?
Sure, you might be the hero who spots an early opportunity and becomes a trading guru for doing so, but, equally, you could be the guy who bet on something that few really had the confidence, to begin with.
Can you balance the risk-reward equation right now? Probably not.
My opinion on this — and it IS just my opinion — is based on being in the sector for some years now and having the occasional, informal, conversation with people who have a better view of this area than me.
I would say that interest overall has grown from where we were even two years ago. There seems to be a ‘wait and see’ approach prevalent right now and there are fewer people dismissing it outright. One of my colleagues observed that a whole new asset class would be ‘exciting and interesting’ if it ever came about. We can definitely agree on that point.
It is clear that the options available right now have helped nudge the market forward for sure, but it still remains little more than a footnote in the grand scheme of things. For whatever reason, few institutions still want to physically hold Bitcoin — even if someone stores and guarantees it for them — and that speaks volumes about the current mentality.
At the same time, incredibly well funded, crypto-friendly companies and individuals with real trading pedigree are working tirelessly on shaping regulation and creating new products based on the world’s most secure financial network, that of Bitcoin.
Whether they ultimately succeed is tied very closely with whether Bitcoin itself will ultimately succeed. But if it does, the amount and sheer speed of investment from traditional institutional investors is likely to be akin to a tsunami.
And that will be fascinating to watch.
A lot has changed since I wrote this article way back in February 2020. The biggest update is, of course, the $425 million Microstrategy deal in August and September 2020. This is a game changing move by an institution and I wrote about what it means for the future in detail here:
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Disclosure: The author of this opinion piece has been heavily involved with Bitcoin for several years and holds a substantial cryptocurrency portfolio, including Bitcoin. He also has a mining operation running the SHA 256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency.
Disclaimer: Investing in any cryptocurrency is extremely risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.