Nov 02, 2020 11:48 PM | Joseph Young

Public companies in the U.S. now own $10 billion worth of Bitcoin, thanks to both increased investment and the token’s October price rise. The figure shows that institutions are eating up the fixed supply of Bitcoin — these public U.S. institutions alone now control about 5% of Bitcoin’s market cap.


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But, there are some concerns regarding the pace at which institutions are accumulating Bitcoin. First, if the trend holds, a small number of institutions will eventually control a large portion of the Bitcoin supply. Since the maximum possible number of Bitcoin tokens is fixed at 21 million, this could cause a supply issue in the future. Some analysts, including the pseudonymous options trader Theta Seek, say that could put Bitcoin at risk in the long run.


In the short to medium term, the positives far outweigh the negatives. But in the next decade or so, if Bitcoin eventually evolves into a global currency atop a store of value, it then could pose certain security risks. In relation to a chart of the BTC owned by institutions, Theta Seek said, “598K BTC that can be seized by the US Government. I don't like this.”


Positives of Public Companies Increasingly Investing in Bitcoin


Michael Saylor, the CEO of MicroStrategy, publicly announced on September 14 that it completed the purchase of 16,796 BTC at an aggregate purchase price of $175 million, bringing its total holdings to 38,250 BTC. 


As of this writing, that 38,250 BTC is worth $504.9 million, as the price of Bitcoin has increased to $13,200 since the purchase. If Bitcoin rises back to its all-time high at $20,000, as many industry executives predict, then MicroStrategy’s holdings would exceed $700 million.


Public companies allocating a portion of their capital or their portfolios into Bitcoin is positive for two reasons. Over time, it could convince other public companies to follow suit, especially if the momentum of the price of Bitcoin strengthens. It also verifies the perception of Bitcoin as an established store of value and a potential safe-haven asset.


In recent weeks, the correlation between Bitcoin and U.S. equities has further declined. Bitcoin has been historically correlated with the U.S. stock market 80% of the time, Cryptowat.ch chartist Kevin Svenson found. Throughout October, while U.S. stocks underperformed, Bitcoin rallied by 22.8% month-to-date, across major exchanges including Coinbase. The lack of correlation between Bitcoin and other risk-on assets strengthens its image as a store of value.


As LongHash previously reported, the impact of the growing institutional demand for Bitcoin has been noticeable in the exchange market as well. Platforms, like Coinbase, LMAX Digital, Bakkt, and CME have continuously seen an increase in volume since August. Consequently, the cryptocurrency market has also seen a unique market dynamic where Bitcoin has been solely increasing while the rest of the market slumped.


Potential Problems with Public Companies Holding Lots of Bitcoin


Although there are far more short-term positives than negatives to the ongoing institutional craze for Bitcoin, there are potential concerns in the long term.


Currently, the number of Bitcoin that public companies own is equivalent to $10.3 billion. A total of 22 companies own 786,059 BTC altogether. But, as the price increases, the dollar value of institutions’ Bitcoin holdings would increase.


The ultimate bull case for Bitcoin varies between investment firms and industry executives. Billionaire Bitcoin investors the Winklevoss twins have emphasized that they expect Bitcoin to reach parity with gold in terms of market cap. Since gold is valued at $9 trillion, that would place the Bitcoin price at $500,000, if it gets there.


“If we are right about using a gold framework to value Bitcoin, and Bitcoin continues on this path, then the bull case scenario for Bitcoin is that it is undervalued by a multiple of 45. Said differently, the price of Bitcoin could appreciate 45x from where it is today, which means we could see a price of $500,000 U.S. dollars per Bitcoin,” Tyler Winklevoss, the CEO of Gemini, wrote.


At a price point of $500,000, 786,059 BTC would then be worth $393 billion, as the value of the holdings of Bitcoin by public companies would scale with the Bitcoin price.


The problem with this is that as years pass and the value of Bitcoin rises, it creates a supply shortage for the average investor. This would cause the price of Bitcoin to increase rapidly, but it might also make it difficult for retail and regular investors to purchase the cryptocurrency. In a market that is already heavily dominated by whales, or high-net-worth individual investors, this could become an issue if institutions continue to accumulate Bitcoin.


But in the decades ahead, if Bitcoin is accepted as a currency and central banks perceive it as a threat against fiat currencies, then the potential risk of seizure could emerge.


However, the sentiment about public companies buying Bitcoin remains overwhelmingly positive because industry executives do not expect Bitcoin to be used as a transactional currency anytime soon.


Mike Novogratz, the billionaire CEO of Galaxy Digital, said he does not think Bitcoin would be used as a currency in the next five years. Currently, Bitcoin is used as a store of value and as a hedge against inflation. Investors, like Paul Tudor Jones, described Bitcoin as the best inflation play in the near future, acknowledging it as a safe-haven asset.


As such, the perception of Bitcoin as a safe-haven asset over a currency, and the development of central bank-backed digital currencies, are unlikely to push the government to take extraordinary regulatory actions against Bitcoin.


“To be honest, I don't think Bitcoin is going to be used as a transactional currency anytime in the next five years. Bitcoin is being used as a store of value. People are worried that the central banks around the world are debasing fiat currencies. And even as we switch to a digital dollar, which is coming, lots of stablecoins going to be issued in the United States,” Novogratz said.


There is also the argument that governments are not likely to take strong actions against Bitcoin because that would hinder the technological development of digital currencies and blockchain technology. 


At a point where Federal Reserve chair Jerome Powell is publicly discussing the outlook of central bank-backed digital currencies, regulators are more likely to be cautious with Bitcoin and the fostering of blockchain development.


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