Qianfeng Capital Management Partner: The entry of traditional institutions will usher in a period of rapid growth
Original Source: Qianfeng Capital
Original Title: "Carrie: Mainstream Institutions Boost Bitcoin to Become a Global Asset"
Original Author: Carrie, Chain Hill Capital Qianfeng Capital Managing Partner
The two biggest forces affecting the development of Bitcoin in 2020 are: Wall Street institutions gradually entering the encryption market, and large technology companies increasing their support for Bitcoin . Driven by these institutions, Bitcoin hit a new all-time high. There are indications that the current rise of Bitcoin is different from the "speculative frenzy" led by retail investors in 2017, and we have reached a historical critical point...
Summary of Institutional Trends in 2020
Image source: Chain Hill Capital
The above chart shows the important traditional institutional admission events in 2020. The market has changed dramatically since famed hedge fund manager Paul Tudor Jones made his key opinion on Bitcoin. Beginning in the second half of the year, the trend of institutional entry became more and more obvious. Institutional investors including enterprises began to invest heavily in Bitcoin, which directly promoted the prosperity of the Bitcoin market in the second half of the year.
Following Paul's judgment that Bitcoin is "the best investment opportunity in the era of great inflation", Larry Fink, CEO of the world's largest asset management company, also Thoughts on Bitcoin are thrown:
“Is it [Bitcoin] likely to develop into a global market? -- possibly.” “Whether [Bitcoin] Will it change the demand for the U.S. dollar as a reserve currency?"
These comments are relatively rare for a notoriously conservative institution. While this doesn’t necessarily mean that BlackRock plans to invest in bitcoin anytime soon, it does show that the agency’s leaders have been educating themselves and doing the necessary work.
These remarks also reveal an important message, that is, Bitcoin has finally reached the stage where every financial institution believes that a "Bitcoin strategy" needs to be developed. These institutions may choose to do nothing, they may choose to gain some exposure, or they may take more significant steps. Although they will make different choices, at least relevant conversations are taking place within these institutions.
So far, various mainstream institutions have conveyed very positive views.
Image source: Chain Hill Capital
Listed companies use Bitcoin as a reserve Assets are another landmark event. Since MicroStrategy announced its purchase of bitcoin in August, its stock price has risen 125%. This might serve as a good example. On the one hand, as the purchasing power of the U.S. dollar continues to decline, more and more listed companies may view cash reserves as an unsafe option, thus converting some of their cash into digital currencies. On the other hand, the wealth effect of buying Bitcoin for MicroStrategy stock may also attract some companies to adopt the same strategy. As a result, the asset reserve needs of large corporations may become a new institutional force.
Image source: yahoo
The significance of the entry of the payment giant Paypal is that it has opened a huge entrance to the retail market. According to estimates by Pantera Capital, purchases on the PayPal platform have exceeded 100% of the new Bitcoin supply. PayPal eliminates the friction associated with buying and holding Bitcoin for investors. PayPal has more than 345 million active users and 25 million merchants, which will greatly expand the user base of Bitcoin (the current number of users in the entire encryption market is estimated to be 100 million ).
Image source: Pantera Capital
Macro hedging. In the current environment of low interest rates and expanding central bank balance sheets, there is a growing demand for hedging against fiat currency devaluation and inflation. As a result, Bitcoin has attracted macro investors like Paul Tudor Jones and Dan Tapiero, who are looking for asset classes that will benefit the most in the current environment; asset allocators like MicroStrategy, Square, who believe that fiat currency devaluation is inevitable, and Bitcoin Cryptocurrency is a sound currency that can replace legal currency; in addition, the investment attributes of cryptocurrency irrelevance have become more prominent in the uncertain environment brought about by the current epidemic.
Value investing. Such investors are optimistic about the digital trend and the long-term value of cryptocurrency technology, and regard cryptocurrency as an asymmetric investment with great potential. They believe that in the long run, cryptocurrencies such as Bitcoin will replace gold and even change the global financial system.
Speculative arbitrage. This includes arbitrage and speculation of all kinds. One of the most active arbitrage activities in the market this year is the arbitrage of Grayscale Trust products.
Strategic layout. Forward-looking financial institutions such as CI GAM, Pendal Group, Fidelity, S&P Dow Jones Indices, and technology companies such as PayPal and Square, have seen the future needs of customers and the development trend of encrypted assets, and made plans in advance.
We can see a significant increase in institutional participation from several sources.
First of all, with the participation of more institutional investors, the scale of the derivatives market for institutional clients continues to expand. The CME is one of the most accurate gauges of institutional interest available today. Since its launch in December 2017, the scale of CME Bitcoin futures has not been large, but since the second half of this year, the open interest of CME Bitcoin futures has continued to hit new highs, accounting for an increasing proportion of the entire cryptocurrency futures market. The higher and higher, which reflects the increase in the proportion of institutional investors.
Image source: The Block
Image source: Ecoinmetrics
In addition, growth in institutional activity can also be seen in the assets under custody of custodians. Coinbase, the world's leading custodian, revealed in November that they had seen an explosion of capital from institutional investors, with assets under custody reaching $20 billion, of which $14 billion was new assets since April this year. Another major custodian, BitGo, announced on Dec. 23 that it has $16 billion in assets under custody, further validating institutional investor interest in cryptocurrencies.
For a long time, the encryption market has been dominated by retail investors. With the entry of more and more professional investors and institutions, we may have come to a critical point. In the future, institutions will have more and more influence on the Bitcoin market, and they will reshape the structure of the Bitcoin market.
The "gray effect" of the future trend will continue in the short term
Gray has created a The trust structure with one-way inflow of bitcoins actually became a black hole for hoarding bitcoins before redemption was opened. The growth of Grayscale Bitcoin holdings this year has achieved a qualitative leap compared to the past, from 260,000 at the beginning of the year to more than 600,000 now.
Image source: The Block< p>
For institutional investors, Grayscale is a very useful arbitrage tool. Based on the current premium, they can achieve an annualized rate of return of up to 60% through arbitrage ( Bitcoin standard). These arbitrage institutions only need to adopt a very simple method-use the bitcoin they hold to purchase private placement shares, and then re-buy the spot to purchase shares during the share unlocking period, and repeat this process continuously.
There are two purposes for re-buying the spot, one is to maintain their original Bitcoin position, and the other is to increase the premium of GBTC (because the premium usually follows the spot market). The higher the unlock period premium, the more Bitcoin these institutions can buy back. They can then use these bitcoins to start a new round of arbitrage.
By tracking the large-scale inflow of grayscale bitcoin trust funds in the past, it can be found that after each large amount of new shares are unlocked, the price of bitcoin At the same time, the premium rate of GBTC will also increase significantly. It is difficult to explain these phenomena repeatedly by coincidence, and it is more likely to be the impact of the above-mentioned arbitrage behavior. Therefore, from this perspective, Grayscale is indeed an important driving force for the current market.
The following is a recent case to demonstrate the grayscale effect. According to the Grayscale Q3 report, the period from April 27th to June 29th this year is the fastest growing period for Grayscale capital inflows this year. The corresponding unlocking time is from October 27th to December 29th.
We can see that in this round of large-scale unlocking period starting from October 27th, The growth of Bitcoin is very strong, and the contribution of the gray effect here is not small.
Image source: AIcoin
We can also find proof in the GBTC premium. After these large shares are unlocked, the premium rate for a period of time has risen a lot compared to before unlocking.
Image source: Ycharts
The "grayscale effect" is undoubtedly beneficial to the spot market of Bitcoin. While this phenomenon is unsustainable in the long run, it is not going away anytime soon. There may even be more similar institutions, enhancing this "grayscale effect". For example, recently, Bitwise’s index fund has also begun to be traded on the OTC exchange of US stocks. The structure of this product is very similar to that of Grayscale-an ETF-like product that does not provide redemption. When Bitwise announced its listing on OTCQX on December 9, its AUM was $115 million. As of December 25, its AUM had grown to $292 million. The time period of more than ten days has nearly doubled, which shows that more arbitrage funds have come in. Moreover, its current premium rate is even higher than that of Grayscale. If this high premium can be maintained, Bitwise will enhance the "gray effect".
The "gray scale effect" may continue until regulatory intervention, for example, mandatory open redemption Back, or the SEC through the Bitcoin ETF causes securities such as GBTC to lose competitiveness and demand.
The entry of traditional institutions will usher in a period of rapid growth
Traditional institutions did not start this year Admission, but before that, mainly venture capital institutions, family funds, and some hedge funds.
This year, we have undoubtedly seen the entry of more mainstream institutions, including top hedge funds, large asset management companies, investment banks, insurance companies, and listed companies. Next, we are likely to enter a period of rapid growth in institutional admissions. This is due to several factors.
Demand for macro hedging continues to strengthen
The world's major economies are at the end of the long-term debt cycle. In this period, characterized by high inflation and currency depreciation, inflation-hedging assets will continue to grow significantly in this environment.
Last week, the U.S. Congress passed a new $900 billion rescue bill. This means that the U.S. is about to inject nearly $1 trillion into the economy, and the new government does not appear to be planning to stop injecting liquidity after this bailout package. The prevailing view is that a Democratic win means more than $2 trillion in future relief (and possibly $3 trillion).
COVID-19 is no doubt adding to an already shaky debt cycle. The United States is trapped in an economy dependent on government intervention. It is estimated that millions of people in the United States have been pushed into poverty since this summer, and those people will be pushed into poverty if the relief bill is not passed. Therefore, whether it is through quantitative easing or interest rate manipulation, it will be difficult for the US government not to intervene in the economy in the future. These government measures could alleviate short-term pain, but would further undermine the dollar's status as the global reserve currency.
In July this year, Evertas, an encrypted asset insurance company, commissioned the market research company Pureprofile to interview 50 institutional investors, and found that 80% of institutional investors believed that the central bank and The recent quantitative easing policies adopted by the government in response to COVID-19 may lead to higher inflation rates, and over the next five years, institutional investors will increasingly invest in Bitcoin as a hedge against this situation and currency debasement.
Traditional investment strategies are challenged
Low or even negative interest rate bonds make traditional The 40/60 portfolio strategy is being questioned more and more. Over the past three decades, the benchmark U.S. Treasury has offered a fixed, reliable yield, averaging 4%. Now the yield of bonds is falling, the annual interest rate of 10-year U.S. Treasury bonds is only 0.7%, and the scale of global negative-yielding bonds has reached 30 trillion. Real yields on bonds are even lower when inflation is taken into account. These negative-yielding bonds will need to find new alternatives.
The famous global macro investor Dan Tapiero pointed out that there are currently "$190 trillion in bonds and cash with real returns close to 0, and these assets have little hope of appreciation. .The market capitalization of the gold investment market is 2.6 trillion, and Bitcoin is 450 billion. The shortage of value reserve assets will lead to the rush of gold and Bitcoin. The fastest horse (Bitcoin) will become faster."
Image source: Bloomberg
Institutional "herd effect"
In 2017, Wall Street financial institutions commented on Bitcoin and other cryptocurrencies as "for A tool in the service of criminals and drug dealers". Warren Buffett called it rat poison; his partner Charlie Munger said Bitcoin was like trading dead baby brains. JPMorgan's Jamie Dimon says he will fire anyone who trades bitcoin.
Now, the narrative on Wall Street is changing rapidly. JPMorgan Chase issued a report in October stating that analysts believe that the price of Bitcoin may double or triple.
There are many reasons for JPMorgan Chase's 180-degree turn, including changes in the macro environment, the entry of PayPal, and the decline in career risks-because like Paul Tudor Investors like Jones have been vocal about their optimism.
The tide is shifting as more and more mainstream institutions speak positively. The leading role played by these institutions will be very strong. They will bring in a large number of followers. We’re entering the next phase of institutional entry — no Bitcoin is at risk, and as this narrative prevails, we’ll see more and more capital inflows.
As SkyBridge's Anthony Scaramucci said, he sees a lot of institutional investors buying cryptocurrencies in 2021, saying, "We could be a lot of institutional investors a harbinger of an influx."
Mainstream institutions promote Bitcoin to become a global asset
The narrative of "digital gold" is mainstreamed Brings a price-positive feedback loop
Narratives are powerful machines that drive results. When all investors start to believe in a narrative, it will change the flow of capital and eventually "self-fulfill". Now that institutions and mainstream media are starting to talk more and more about Bitcoin "digital gold" and stories about alternative assets, this narrative will continue to strengthen and will bring about a positive feedback loop.
As some institutions start to believe that Bitcoin is "digital gold", they will bring in more money, which has caused the price increase we are currently seeing. As the price rises, it attracts more institutional attention, which triggers increased demand, which in turn leads to more price increases and further strengthening of the narrative.
Institutional investors will provide a huge source of demand for Bitcoin. Unlike retail investors, the funds of mainstream institutions are long-term players. Therefore, this positive feedback loop of prices will last longer and more robustly. This will continue until true FOMO triggers a market crash.
Institutions become the bridge for Bitcoin to the mass market
In the technology life cycle, There is a gap between the early market and the mass market for a new technology, and mainstream institutions will be the bridge for Bitcoin to bridge this gap. At present, the user threshold and cognitive threshold of cryptocurrency are relatively high, and there is a lack of perfect and convenient solutions in terms of purchase, use, storage, and compliance. Institutions can complement this lack and provide complete solutions. We will see more financial advisors providing cryptocurrency-related investment advice to clients, and more financial institutions providing cryptocurrency investment tools in a way investors are familiar with (such as mutual funds). Funds, ETFs), banks chartered by the US federal government have begun to provide custody services for encrypted assets, and platforms such as Paypal will continue to improve the entrance of encrypted currencies. Based on their existing client base, these institutions can bring Bitcoin to a broad mainstream audience.
Summary, traditional asset management institutions manage nearly trillions of assets, and their entry will be Cryptocurrencies bring huge incremental capital. As the market cap grows, the crypto market will become more mature and price volatility will gradually decrease. All of this will lay the groundwork for Bitcoin to become a global asset.
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