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The Institutional Influence on Bitcoin

April 17th, 2024Rich ExcellRich Excell

From the earliest days of bitcoin trading, it was an outsider’s market. The terms crypto-native, on-chain, and HODL came about to remind everyone that this market was different than all other markets. It had none of the bad features of third-party intermediaries that charged too much and took too long. It had all the positive features of being trustless, distributed, and limited in supply. 

Then came the first crypto winter in 2018, when Bitcoin lost 75% of its all-time-high.  

In late 2020 and early 2021, the idea of institutionalization of cryptocurrencies and the large potential flow of money from a new source became much more appealing. This was a time of ‘if every institutional investor just committed one percent of their AUM to Bitcoin, imagine where it could go.’ 

It really started with MassMutual buying $100bb in bitcoin in December 2020, but 2021 saw more institutional investors get involved. Both Cboe and CME Group listed futures and option products in anticipation of a rush of institutional money. In October of 2021, the BITO ETF (Exchange Traded Fund) started trading, which linked to futures markets at the CME Group.  

The bullishness was not just about the validation of a product, it was about the major flows that were coming in. Institutional money can be a blessing and a curse. The flows are great on the way up, but they may also be painful on the way down. As the onslaught of institutional money might change the landscape for bitcoin and see more of a focus on portfolio management tools, it could modify bitcoin’s correlations with other assets. 

It took much longer than expected to finally get the approval for an ETF from the SEC, but it came early this year. Then more than $55 billion flowed into ETFs. Even accounting for money flowing out of GBTC (Grayscale Bitcoin Trust), this is the largest ETF launch in history. CME Group has become the largest cryptocurrency derivatives exchange in the world.  

In early 2021, as attacks that turned into a war began in Europe, bitcoin soared to new heights.  This could have been influenced by a strong market demand for yield, but regardless of the exact reason, it seems that the bitcoin price might have overlooked the negative geopolitics. However, this past weekend, as negative geopolitics flared in the Middle East, bitcoin went the other way. Money came out of the asset, prices went lower. Bitcoin seemed to behave like a risky asset, leading to some institutional investors pulling away as concerns grew. 

The influx of institutional money into bitcoin is not primarily driven by viewing it as digital gold or a store of value. Instead, institutions regard bitcoin as a potentially uncorrelated asset that offers high potential returns. They see it as a risky asset that provides opportunities for profit. During challenging economic periods, institutions typically convert assets to cash, treating bitcoin similarly to Nasdaq stocks, credit spreads, or EMFX (Emerging Market Foreign Exchange), which indicates a significant perspective as the market evolves. 

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Financial Advice Disclaimer: Nothing in this article constitutes professional or financial advice, performance data or any recommendation that any specific cryptocurrency, portfolio, index, investment product, transaction or investment strategy is suitable for any specific person. You assume the sole responsibility of evaluating the merits and risks associated with all financial decisions and should seek the advice of a registered financial advisor when in doubt.

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