“Money is flowing out of conventional assets into Bitcoin due to the escalating risks of global currency devaluation, technology disruption, social dislocation & political uncertainty. This is not a “rally” or “bubble” - it’s a chain reaction spreading like a fire in cyberspace.” - Michael Saylor, MicroStrategy
Bitcoin, the leading global digital asset, has ascended 232,61 percent between January and December of 2020. Despite the macro-induced momentarily weakness in March, Bitcoin has performed exceptionally well. The rally has been distinctively driven by institutional appetite, with companies like MicroStrategy, Ruffer Investment Company, and Square entering the space. However, past performance is not necessarily a guarantee of future results, how to augur the year ahead? Let’s find out.
The current market cycle, emerging in 2020, has been characterized by growing institutional demand. Perhaps the most famous Bitcoin allocation was made by MicroStrategy (MSTR), an US-based business intelligence company. MicroStrategy’s CEO Michael Saylor has distinctively positioned himself as a “bitcoiner”, allocating his own wealth vis-à-vis MicroStrategy’s resources.
Saylor sees Bitcoin as “hard money” and store of value (SoV). Additionally he’s mainly indicating using Bitcoin as an instrument to hedge global currency devaluation, technology disruption, social dislocation & political uncertainty. MicroStrategy has made such a pronounced pivot into Bitcoin, one could consider MSTR as an unofficial “Bitcoin ETF”. However, for an investor looking to gain linear bitcoin exposure, products like Grayscale’s GBTC might more sense.
“Bitcoin is a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster, and stronger behind a wall of encrypted energy.” - Michael Saylor, MicroStrategy
In addition to MicroStrategy’s huge allocations, companies like Guggenheim Partners and Ruffer Investment Company are entering the space. Guggenheim Partners has reserved the right to set aside as much as 10 percent from its $5,3 billion Macro Opportunities Fund to invest in Grayscale Bitcoin Trust (GBTC). Ruffer Investments Company allocated 2,5% of its $20 billion portfolio into Bitcoin in November 2020.
Grayscale’s Bitcoin Trust (GBTC), undoubtedly the biggest bitcoin-related financial product, has increased its holdings into incredible 546 544 units. This represents approximately 3,4 percent of all bitcoins in circulation. GBTC is especially popular among institutional investors and more specifically hedge funds.
Grayscale’s Ethereum Trust (ETHE) has grown even more, from January 531 510 ETH to >2,71M ETH in the tail-end of 2020. ETHE’s growing popularity indicates Ethereum’s established position as the de facto decentralized application platform.
Retail Waiting on Sidelines?
Whilst institutions have been accumulating Bitcoin in an escalating fashion, retail segment has been relatively quite, for now. Looking back at search engine data, the 2017 market cycle was in its own class in terms of retail participation.
The current 2020 market cycle shows similar levels of search queries as in mid-2019 summer bull market. The 2017 market cycle was heavily characterized by ICO funding rounds, often using controversial pump&dump strategies. These ICO funding rounds were heavily marketed towards the retail segment.
2021 might include a retail-driven altseason, however it might regard new DeFi-based tokens instead of old altcoins. Institutions will continue to pull Bitcoin upwards and the correlation between leading digital assets and alts might weaken.
Bitcoin versus Gold
“The rise of cryptocurrencies in mainstream finance is coming at the expense of gold. The adoption of bitcoin by institutional investors has only begun, while for gold its adoption by institutional investors is very advanced. If this medium to longer term thesis proves right, the price of gold would suffer from a structural flow headwind over the coming years.” - JPMorgan
Gold, the de facto global store of value (SoV), has somewhat surprisingly lost its momentum during 2020 market cycle. As JPMorgan predicts, gold might suffer from bitcoin’s price performance as institutions look for fresh alternative investments. The adoption of bitcoin by institutional investors is in its early stages, while gold market looks saturated. Nevertheless, gold will likely keep its position as it’s deeply embedded into the financial ecosystem.
Facebook Diem (Libra)
The social media giant and technology company Facebook is reportedly planning a Libra relaunch during the first quarter (Q1) of 2021, the enterprise has been rebranded as Diem. The Libra Association now plans to launch a single dollar backed coin. It would compete directly with other stablecoins, such as USDC, PAX and Tether (USDT). Facebook’s current user base is close to 3 billion, if they’re even able to convert 1–10% of their user base into the Diem ecosystem, it would create an enormous competition to traditional national currencies.
The DeFi sector should be on every investor’s priority list in 2021. Decentralized finance is currently building future financial systems which will be either standalone or integrated with current financial sector.
Compared with the traditional centralized financial service sector, DeFi’s main value proposition is to solve the inherent challenges related to the old finance industry. The most notable drawbacks of “old finance” are considered to be single points of failure and control, monopolizing power, and bureaucracy.
The Upside Potential
The digital assets are still in their pioneer phase and thus any investor, retail or institutional, can be considered as an early adopter. Bitcoin mainly derives its value from extreme scarcity and bitcoin is in its path to become the most scarce asset on earth. Other applications, like decentralized finance, offer new narratives on how finance systems should be built and managed, paving the way into future ecosystems.
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Data sources: dcresearch. Dune Analytics. Grayscale.
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