As the price of the cryptocurrency surges to new record highs, there is growing evidence that institutional investors are driving demand.
The past year has been a turning point for Bitcoin. Since the beginning of 2020, the value of the cryptocurrency has surged from around £6,500 to close to £30,000 per unit, a near 300% increase.
It is not the first time the currency has experienced sharp spikes. In 2018 it rose to almost £15,000 but swiftly lost more than half of its value during that year. But while the last spike was mainly driven by retail investors, the current rise appears to have some form of institutional backing.
“The shift really took place at the end of the year, when Paypal announced that its customers would be able to buy and sell Bitcoin using their accounts combined with a number of larger institutional investors announcing Bitcoin commitments,” said Giles Coghlan, chief currency analyst at HYCM, a broker which offers Bitcoin trading.
He adds that the current macroeconomic environment, in particular the prospect of rising inflation, has accelerated the trend. “The price of Bitcoin is going higher for the same reason as gold prices are rising, on the expectation of coming inflation and in the face of constantly increasing asset purchases and a falling dollar,” he added.
The rapid price growth was artificially accelerated by a process called “halvening”, the gradual reduction of Bitcoin output produced by miners. In the absence of the central bank backing a traditional currency can rely on, scarcity of the asset, which is artificially created, is Bitcoin’s only claim to value.
Bitcoin whales
One indication for rising institutional interest in Bitcoin is that the number of addresses holding the cryptocurrency has grown less rapidly than its price, suggesting that there is now a growing number of larger volume Bitcoin accounts than three years ago, according to Coin Metrics.
And while many “Bitcoin whales”, investors holding large amounts of the cryptocurrency, sold their investments in the run up to the 2018 slump, the number of large-scale investors in Bitcoin appears to be growing steadily. Coinbase, a trading platform for cryptocurrencies, reports that its institutional assets under control grew from $6bn (£4.4bn) in April 2020 to more than $20bn (£14.6bn) by the end of the year.
One prominent example is MassMutual, the $235bn (£172bn) US life insurance giant, which bought $100m (£73m) worth of Bitcoin at the end of last year for its investment account and acquired a $5m (£3.6m) minority stake in Bitcoin technology provider NYDIG.
“MassMutual’s investment of Bitcoin into its general investment account reflects our broader strategy to capitalise on evolving opportunities while remaining diversified across a variety of asset classes. In addition, our investment in NYDIG and Bitcoin aligns with MassMutual’s overall commitment to innovation, giving us measured yet meaningful exposure to a growing economic aspect of our increasingly digital world,” a MassMutual spokesperson told portfolio institutional.
Across the pond, investors appear to be more cautious to embrace the crypto trend. “I don’t think Bitcoin has become mainstream enough for pension funds to start looking at Bitcoin.” Coghlan said. “It is still limited to investors seeking excessive returns, for example, hedge fund or wealth managers.”
There are early indications that this could change. A survey among UK and US institutional investors by crypto-asset insurer Evertas revealed that around a quarter of respondents predicted that institutional investors would “dramatically increase” their cryptocurrency investments.
In the UK, investment manager Ruffer has taken the bold step of allocating $15m (£11m), or 2.5% of its multi-strategy fund, into Bitcoin. But for most UK pension funds and insurers, the lack of liquidity, volatility risks and the absence of a clear valuation have been a deterrent to invest. Their concerns were at least partially reinforced by the FCA, which has banned the sale of crypto-based ETN’s and derivatives to retail investors in January. Consumers investing in Bitcoin should be prepared to lose all their money, the watchdog issued in a stern warning.
Meanwhile, Bitcoin-linked securities have enjoyed growing popularity among investors in Europe and the US. Exchange traded crypto funds, such as Deutsche Boerse-listed BTCetc Bitcoin Exchange, have enjoyed strong trading volumes this year, creating the impression of liquidity for an otherwise relatively illiquid asset class.
But Bitcoin’s latest source of strength could also be the reason for its next downfall. The semblance of liquidity could swiftly evaporate if institutional investors stop buying the currency in large volumes or even attempt to monetise their gains.
Coghlan added that with Bitcoin being a trade on a deteriorating economic outlook, any sign of improvement could be bad news for the cryptocurrency.
“We have seen that Bitcoin and gold prices dropped when we had news such as Biden’s larger than expected recovery package or the Pfizer BioNTech announcement,” he added. “I don’t see anyone holding on to Bitcoin or gold in a strong recovery scenario,” he warns.
