Special Series:
Institutional Investment in the Bitcoin Market

This is the first of a 5-part series on the development and intricacies of institutional investment in the Bitcoin market. In this first article, we present an overview of the current state of Bitcoin's institutional investment. 

Part 1: Bitcoin and the institutional wave

Apr 30, 2021

Antecedents

Since its inception 12 years ago, Bitcoin has caught the attention of different and distinct groups as it has matured. During its earliest years of development, Bitcoin was passionately the bastion for cryptographers, computer scientists and libertarians who were interested in the technological breakthrough brought by Satoshi Nakamoto. 

 

This was followed by the arrival of retail speculators on the scene, attracted by Bitcoin's outsized volatility and returns, who started to exert new dominance in the space. Whilst retail trading of Bitcoin still predominates, Google Trends data suggests that it may have reached its peak during the 2017 bull run - as the large institutional flows are now seen to be wrestling away that control with sizable investments and the product innovation. 

 

Ironically, it was during the retail frenzy that the narrative "blockchain, not Bitcoin" emerged amongst many of these same banks and financial institutions. Not sold on Bitcoin as an asset class, they were keen to look at Bitcoin's underlying disruptive technology, the blockchain, as the next investment theme or a way to improve their businesses - and so the talk of “smart contracts” created quite a buzz. 

We could write an entire paper about why most of these "Enterprise Blockchain" initiatives have yet to truly deliver on their promises, but in this series, we are going to focus on why Bitcoin, now a trillion-dollar asset, is being considered as an investment by institutional investors such as public companies, banks, family offices, asset managers and insurance companies.  


Public companies surrender to Bitcoin

At the time of writing, according to crypto data website CoinGecko, 21 public companies (globally) hold Bitcoin on their balance sheet, totalling over US$ 10 billion (see below chart). Of the total Bitcoin supply, these institutions have treasuried only 0.95%, corresponding to ~178.5K bitcoins. Among these companies, we have names like Tesla, MicroStrategy, Galaxy Digital Holdings and Square. OSL recently partnered with Meitu (HKSE 1357) adding some Asian flavor to the mix, as the Chinese technology company upped its digital asset holdings to US$100m, across $BTC and $ETH. 

 

It's important to point out that it was not until August 2020 that listed companies started to pour considerable amounts of money into Bitcoin. MicroStrategy and its CEO Michael Saylor led the pack, followed by Elon Musk (Tesla) and Jack Dorsey (Twitter/Square) in making sizable corporate investments into Bitcoin, and in the process becoming champions of the space. Meitu’s recent investments suggest this is not a trend reserved for southern California, and may indeed be the start of more Asian firms entering the market.

 

According to the World Bank, as of 2018, there were 43,342 public companies in the world. What would happen to Bitcoin's price if only 1% of them bought into it?

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The futures market swells

In late 2017, when Bitcoin's price almost reached US$ 20,000 per unit, there was a lot of anticipation about the Chicago Mercantile Exchange (CME) Bitcoin Futures contracts debut. Those who were in the market at that time will remember that many analysts suggested that this product would finally allow institutions to get exposure to Bitcoin. In reality, it took some years for Bitcoin futures to pick up in volume.  

It was only in November 2020, and especially in 2021, that we could see considerable growth in Bitcoin's future contracts volumes - driven by the emergence of hedge funds and institutions into Bitcoin. 

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Fast forward to 2021, and the CME has now added Ether contracts to its futures offering as the space continues to grow.

 

Crypto funds growth

Another indicator of institutional interest is the assets under management of crypto funds. At the time of writing, more than US$56 billion is held in crypto asset funds around the world. Most of it is managed by Grayscale Bitcoin Trust.  

Specifically in Brazil, according to market data provider Economatica, there is over R$ 2.3 billion sitting in funds managed by Hashdex, BLP, QR Capital, BTG Pactual, Vitreo and others. 

Bitcoin ETFs have arrived 

The United States has yet to approve a Bitcoin ETF, but there's increasing pressure on the U.S. Securities and Exchange Commission (SEC) to do so. At the moment, there are at least seven companies vying for such an approval along with Grayscale, which is looking to convert its trust into an ETF. 

Most recently, Brazil has approved two cryptocurrency ETFs, including HASH11 which has officially  launched to Brazilian investors. Hashdex's ETF replicates the Nasdaq Crypto Index (NCI) cryptocurrency basket and made its B3 debut earlier this week (April 26). Next to be listed will be QBTC11 from QR Capital. Still without a launch date, the ETF will bring its investors exposure to Bitcoin (from regulated exchanges around the world) using CME Group’s CME CF Bitcoin Real Time Index (BRTI), to calculate the price.

 
Meanwhile, Canada has three bitcoin ETFs actively trading on its primary board, the Toronto Stock Exchange.  The fanfare that the Toronto-listed Purpose Investments’ product has received since it debuted (reaching over US$1B in AUM) coupled with the sentiments in Brazil only punctuates the “what ifs” for when similar offerings will eventually hit the US market.  

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Conclusion

There appears to be  huge institutional and corporate appetite flowing into the crypto market. Apart from what was said above, a growing number of prominent banks and traditional companies are revealing plans to be part of the crypto market. 

Financial institutions, like Morgan Stanley, JPMorgan, Goldman Sachs, BNY Mellon and others, have publicly stated that they intend to offer clients access to bitcoin funds. Companies like PayPal and Mastercard have also joined the party and are creating ways to offer their clients crypto services. 

 

In parts two, three and four of our series, we will take deep dives into some of the dynamics that have spurred this radical mindset shift and have been key drivers behind the institutional adoption of Bitcoin and digital assets we continue to see.

 

Part 2:  Bitcoin as an uncorrelated and risk diversifier asset

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