Cryptocurrency – all grown up
through James stickland, general manager of Elwood Technologies
With a market cap of over $ 1.2 trillion for Bitcoin alone and over $ 2.8 trillion for digital assets combined, the cryptocurrency has moved from the ‘new market’ phase and is now reaching its maturity.
How did he get here? Increased institutional adoption, improved infrastructure, and the approval of the first Bitcoin ETF (exchange-traded fund), all helped secure digital assets at the adult table.
Identifying when a market matures is not an exact science. New markets are emerging with varying degrees of traction – the futures market is a prime example. Although futures contracts date back to the formation of the Chicago Board of Trade in 1848; they only started trading widely around two decades ago, becoming increasingly attractive to investors since. In 2017, it was not clear whether cryptocurrency would become a legitimate asset class. There certainly weren’t many people who thought the market would mature in such a short time.
The impressive growth of cryptocurrency
The high-profile cryptocurrency rallies and crashes of previous cycles look different from this latest boom. Unlike the frenzied highs of 2017, when retail investors fueled the Bitcoin bubble, institutional investors are now taking the market seriously. Hedge funds, endowments, family offices and private companies all invest in digital assets.
While many leading financial institutions were experimenting with the technology in 2018, the second half of 2020 was where we saw the push towards this transition. Business intelligence firm MicroStrategy announced its first BTC investment in August, making an initial purchase of $ 250 million. The forward-thinking tech company led by CEO Michael Saylor has embarked on an aggressive buying spree, investing a total of $ 3.16 billion to date to increase its BTC holdings to 114,042 BTC (approx. $ 7.3 billion at time of writing).
MicroStrategy was quickly followed by payments firm Square, allocating 1% of its total assets to BTC ($ 50 million) in October. Around the same time, prominent global investors and hedge fund managers, including Stanley Druckenmiller and Paul Tudor Jones, expressed their support for Bitcoin.
Meanwhile, traditional financial institutions that avoided or downplayed Bitcoin in 2017, including Goldman Sachs and Morgan Stanley, have shifted their stance. They recently offered digital asset exposure to their wealth management clients. Several other global financial institutions, such as BNY Mellon, have also announced their intention to provide digital asset custody services after receiving the go-ahead from the Office of the Comptroller of the Currency (OCC).
A perfect macroeconomic storm
Macroeconomic factors have also contributed to the institutional adoption of the cryptocurrency as investors seek alternative assets. Unprecedented multibillion-dollar stimulus packages in response to the pandemic have led to an uncertain environment of rising inflation and low interest rates.
Investors holding cash or cash-like assets, such as treasury bills, receive near negative returns – any potential returns being quickly wiped out by inflation. When Saylor spoke about his decision to allocate MicroStrategy’s assets to BTC, he explained that they were rapidly losing value in the current economic climate; âWe really felt like we were on a $ 500 million melting ice cube,â he said.
The argument for BTC as a digital gold, store of value, or inflation hedge is becoming increasingly convincing in the face of growing money supply and a rapidly degrading global reserve currency . Not to mention the duty of corporate treasurers to provide investors with returns in a low return environment. Digital assets have undeniable potential for capital accumulation, with Bitcoin being the best performing asset of the decade several miles out of country.
Approval of a Bitcoin ETF
In October, a turning point occurred for cryptocurrencies, and arguably one of the clearest indicators of market maturation. After eight years of waiting, the first Bitcoin ETF in the United States, ProShares Bitcoin Strategy ETF, finally received SEC approval and began trading, debuting as the second largest traded fund in history and the first to reach over $ 1 billion in trading volume in just two days.
Closer to home, further encouraging developments occurred during the same week, as Jacobi Asset Management received approval from the Guernsey Financial Services Commission (GFSC) to launch the world’s first physically backed Bitcoin ETF. a fund and owned by Fidelity Digital Assets. Pending approval from the Financial Conduct Authority (FCA), Jacobi will list his ETF on Cboe Europe, one of the largest pan-European stock exchanges.
The approval of a Bitcoin ETF sends a powerful message, this asset class is here to stay, legitimizing the cryptocurrency market and helping to attract more institutional investors. It’s also a step in the right direction that could eventually pave the way for the approval of a physical Bitcoin ETF in the US and Europe, which would be a catalyst for exponential market growth.
Improved infrastructure for institutional investors
Cryptocurrency infrastructure, which is usually cumbersome and not designed for big investors, is also improving. This is another key sign of maturing markets, as high-security, professional-grade software that meets rigorous institutional standards becomes available.
Even existing cryptocurrency platforms are responding better to the influx of demand, with much less downtime than before. Popular brokers like Robinhood offer their clients digital asset trading, rather than forex or futures. This highlights how the cryptocurrency broke through these two markets in a short period of time.
We are also seeing a disruption in the digital asset custody landscape, with an increase in institutional grade custody solutions available as banks and large institutions toss their hats in the ring.
At this point, it seems likely that digital assets are here to stay. With a much more robust framework, improved infrastructure, and greater regulatory clarity, more and more institutions are finding ways to allocate digital assets. They can now do so with greater confidence in the sustainability of the market.