By Seamus Donoghue, VP Sales and Business Development at METACO
Bitcoin has always been fond of a new year’s rally, and its January climb to all-time highs bears testament to that. However, there are fundamental differences in this latest market movement compared to previous ones--not least the strength of Bitcoin as an asset.
In the 2017-2018 crypto bull run, access to crypto markets was relatively difficult and available only through small crypto startups. One of the defining drivers of the 2020 bull market was new institutional infrastructure that delivered easy access for new investors, for example, PayPal enabling its 350 million users to instantly access the crypto markets.
The Bitcoin halving was also a notable event, with only 300K Bitcoin minted this year, compared to 600K in previous years. That equates to 6.25 Bitcoin per block and with an average of 144 blocks per day, or at current prices roughly $35 million worth of newly mined Bitcoin per day. Since a significant portion of existing Bitcoin is “illiquid”, 300K is far too little supply for the massive demand coming from institutional players. Add to the mix the narrative of Bitcoin as digital gold--an inflation hedge against the vast levels of stimulus being pumped into the economy--and the surge in Bitcoin price to $40K begins to make a great deal of sense as the only way to address insufficient supply is higher prices.
The hypothesis that investors will abandon Bitcoin once they can gain positive yields from traditional investments is far from certain. It is difficult to see a “normal” cycle return to positive rates given the excess leverage in the market and the impact we have seen previously from any attempt to normalize monetary policy. It is more likely that any move to positive rates would be inflation driven given the excess in central bank reserves and the explicit intent of central banks to re-ignite inflation, to a degree this is already a significant factor driving investor demand.
Once market psychology towards inflation has been altered, it can be tough to reverse, particularly given the long term nature of such shifts in inflationary expectations--it is like the saying “you can’t be a little bit pregnant”. It could be very easy for the market to shift from too little inflation, to too much--which would be explosive for Bitcoin demand.
Looking forward the first major milestone will be matching the market cap of the physical gold market: $11-12 trillion. An equivalent BTC market cap would mean a BTC price of $550,000 to $600,000. The historical challenge for institutions interested in crypto has been whether there is sufficient liquidity in the market, or put another way: is the asset class large enough to define BTC as an essential allocation for institutional investors. The market cap of BTC has grown rapidly as new institutional buying comes into the market.
The journey towards an equivalent market capitalization of gold is creating a virtuous cycle that as more institutions buy into the market, the asset class grows, making it an eligible investment for an ever large set of institutions. Higher prices directly address secondary market liquidity and we have seen the market cap rise from $350 billion to over $1 trillion. Market cap growth has been further accelerated by a shortage of available Bitcoin under 20K when PayPal was buying in quantities that exceeded all the newly minted Bitcoin.
However, in the medium term, I expect two broader narratives to take shape. Firstly, the institutional allocations out of fixed income into Bitcoin. The fixed income market with roughly $17 trillion in negatively yielding debt would be better referred to as “fixed loss”. The typical 60/40 equity and bond allocation is no longer fit for purpose given the negative, or near zero yield of the bond allocation--government bonds no longer insulate the overall portfolio from the typically higher risk of equity holdings and instead introduce an asymmetric risk of capital loss.
The second narrative is Bitcoin as the emerging, non-sovereign, internet native payment solution--the internet of value. Both of these narratives could drive Bitcoin’s capitalization into the multi-trillions. The trajectory will not be a straight line and Bitcoin will see 10-30 per cent retracements along the way, but a crash (as we saw in 2018) is no longer on the cards.
The fall of XRP demonstrates the newfound strength of the crypto market. If the Securities and Exchange Commissions’s (SEC) legal challenge against Ripple had taken place in 2017, the news would have crashed the entire crypto market and we would have seen a flight of capital out of crypto. It is a sign of the market maturing that despite the SEC`s pursuit of XRP, the total crypto market cap has risen continuously since the news broke--with BTC leading the market. Instead of running away from crypto XRP holders have switched into more credible cryptos such as Bitcoin, Ethereum and Polkadot.
A Bitcoin exchange traded fund (ETF) will likely be the next major validation of crypto as an asset class. Research by Aite Group shows that close to a quarter of U.S. adults with access to the internet are retail online traders and an additional 6% are professional traders. Together this equates to a self-directed U.S. trading population of more than 54 million adults. A listed Bitcoin ETF would open up investment access to the $7 trillion in assets currently held in ETFs, and provide instant access to the asset to every retail and institutional brokerage account.
We are moving to an exciting phase of action for Bitcoin, where much of the hype that surrounds the asset is beginning to become a reality. As the asset moves closer towards a staple market offering, it is clear that it is time for investors to get on board, or risk being left behind.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.