In 2017, the price of Bitcoin reached an all-time high at $20,093 on BitMEX and above $23,000 in South Korea’s cryptocurrency exchange market. Compared to two and a half years ago, there is significantly more capital from institutional investors in BTC despite a 53% drop in price from $20,093 to $9,400.
Three main factors could be triggering the inflow of capital from institutional investors to Bitcoin in 2020: positive sentiment among high-profile investors and institutions, the maturity of BTC, and strengthening fundamentals.
The assets under management (AUM) of Grayscale is often used to measure the level of involvement from institutional investors in Bitcoin. In the U.S., the lack of an exchange-traded fund (ETF) narrows the available options for institutions to invest in cryptocurrencies down to two: exchange custody and Grayscale.
The Grayscale Bitcoin Trust is an investment vehicle that is publicly traded on over-the-counter securities trading exchange OTC Markets. It allows investors to gain exposure to Bitcoin, reducing risks involved in directly holding Bitcoin for large-scale investors.
When the price of Bitcoin was at a record high, the AUM of Grayscale Bitcoin Trust peaked at $2.966 billion. That means the amount of capital that was invested in Bitcoin primarily by accredited and institutional investors was just below $3 billion.
In contrast, as of June 23, the AUM of Grayscale Bitcoin Trust is above $3.5 billion, nearly 20% higher than where it was when the price of BTC was hovering at its historical peak.
A substantially higher number of institutions invested in Bitcoin through Grayscale Bitcoin Trust than in 2018. The Grayscale Digital Asset Investment Report for the first half of 2018 shows that 56% of investments into Grayscale’s products came from institutional investors.
The 2018 H1 report said:
“Through our analysis, we determined that most asset inflows are coming from institutional investors. This segment comprises roughly 56% of all investment YTD, followed by accredited individuals (20%), retirement accounts (16%), and family offices (8%).”
However, in the first quarter of 2020, a staggering 88% of investments into Grayscale came from institutional investors. A much higher percentage of investors into cryptocurrency-related investment vehicles came from institutions in comparison to previous years.
The 2020 Q1 report read:
“Institutional investors, primarily hedge funds, continued to be the primary source of investment capital in 1Q20 (88%), with an even higher share than T12M (79%). The geographic source of new investment capital this quarter was more heavily weighted to offshore investors, while historically it has been roughly split between U.S. and offshore investors.”
Based on these numbers, Weiss Ratings said the “floodgates” opened for big institutions to enter the Bitcoin market. In the upcoming months, the shift in stance from key financial institutions could further fuel additional institutional activity.
Positive sentiment around Bitcoin among institutions
Throughout the past three years, major financial institutions in the U.S. maintained a rather hostile stance towards Bitcoin. JPMorgan, in particular, has been a long-time critic of Bitcoin. Jamie Dimon, the CEO of JPMorgan, described Bitcoin as a fraud less than three years ago.
JPMorgan changed its tune on Bitcoin in recent months. A team of analysts at JPMorgan said Bitcoin has staying power, and that it is looking more positive.
The analysts said:
“Though the [bitcoin] bubble collapsed as dramatically as it inflated, bitcoin has rarely traded below the cost of production, including the very disorderly conditions that prevailed in March.”
The investment bank also reportedly opened bank accounts for cryptocurrency exchanges Coinbase and Gemini, vamping up its support for the industry.
High-profile billionaire investors, including Paul Tudor Jones, have started to acknowledge Bitcoin as a potential hedge against inflation over the long run. Tudor Jones revealed he has 1% of his net worth in BTC.
The maturity of Bitcoin, in large part, triggered the rise in appetite towards Bitcoin from institutional investors. Tudor Jones specifically pinpointed survivability as one of its appealing characteristics.
“[I have] just over 1% of my assets in bitcoin. ... Every day that goes by that bitcoin survives, the trust in it will go up,” he told CNBC.
At its core, Bitcoin is a computing network and a decentralized blockchain network. Over time, as the number of blocks add up and the amount of computing power—described as hash rate—continues to increase, the Bitcoin network matures and expands.
According to data from Blockchain.com, the hash rate of the Bitcoin network increased from 57m terahash per second (TH/s) to 105m TH/s from June 2019 to June 2020, within 12 months.
The consistent increase in the hash rate coincided with the third block reward halving of Bitcoin’s history. Theoretically, the halving—a mechanism that is activated once every four years—should lead to a significant decline in hash rate because it decreases the amount of BTC miners can generate by half.
Bitcoin has a fixed supply of 21 million BTC. As it gets closer to the maximum cap, miners can generate less BTC. Since it costs more to mine BTC after a halving, typically, the hash rate of Bitcoin tends to slump immediately after it.
Although the hash rate of Bitcoin dropped from 120 million TH/s to 90 million TH/s after the halving, it recovered to over 100 million TH/s within a month.
A confluence of the resilience of the Bitcoin network’s hash rate, improving the perception of Bitcoin by key financial institutions, and a rapid increase in the inflow of capital from institutions differentiate the landscape of the Bitcoin market in 2020 compared to previous years.
Another positive metric for the medium-term trend of Bitcoin that supplements the growing institutional demand for Bitcoin is the declining reserve of cryptocurrency exchanges. It indicates that fewer retail investors are trading on exchanges.
Researchers at Glassnode said:
“BTC Balance on Exchanges just reached a 1-year low of 2,622,984.499 BTC Previous 1-year low of 2,623,005.552 BTC was observed on 19 June 2020.”
If retail trading activity continues to drop throughout 2020, it could lead to an increase in the market share of institution-tailored exchanges. That would cause the dynamic of the cryptocurrency market to change, which may lead to price movements and cycles that largely differ from 2018 and 2019.
But not all financial institutions are convinced that Bitcoin has a bright long-term future. During a client call in May, Goldman Sachs implied hedge funds are trading cryptocurrencies merely due to their volatility.
"We also believe that while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale,” the Wealth Management division of Goldman Sachs said, in a presentation shared by former investment banker Ethan Vera.
Institutions and high net-worth investors remain mixed on the trajectory of Bitcoin. Some foresee an evolution into an established store of value and a safe haven asset. Others expect the growth of BTC to be limited in the years to come.