On the 5th of October bitcoin (BTC) broke back through the key mark of USD 50,000. Many have been speculating whether the recent technical analysis suggests it is setting up to push past the previous all-time-high of USD 64,000.
What we consider to be more important is that there are a number of material factors in the digital asset industry that have not co-existed till now. Together these lead us to the question of whether we may be on the cusp of institutional adoption.
We analyze and explain three of these factors below:
Following the latest ban by China on the 24th of September, the world looked to the United States for clarity from the regulators and lawmakers over their stance towards cryptocurrencies. Federal Reserve head Jerome Powell has been notoriously wary of digital assets and the new Securities and Exchange Commission (SEC) Chair Gary Gensler initially appeared to be of a similar mindset, adopting a cautious and non-committal approach to how the SEC plans to treat them.
In a boost for the crypto industry and associated institutional interest, both Jerome Powell and Gary Gensler stated they had no intention to ban cryptocurrencies on the 30th of September and 5th of October respectively. Couple that with the support that Gensler reiterated for a bitcoin futures-based exchange-traded fund (ETF) on the 29th of September, along with his recent comments that bitcoin could be seen as a “store of value” and a picture begins to emerge that the world’s most influential regulator is starting to warm to crypto (within reason).
The SEC has wrestled with allowing Bitcoin ETFs backed by physical bitcoin, given that so much of the underlying trading occurs on unregulated exchanges.
The alternative would be to allow a futures-based ETF via a regulated exchange such as the CME. This would address the concerns about market surveillance, but futures-backed products are often inferior to the ones based on the spot market. With CME Bitcoin futures volumes totaling USD 51bn last month, having grown 236% year-on-year according to data from the Block, there has been a lot of optimism about relying on futures markets to launch the first ETFs.
A raft of bitcoin futures ETFs have been submitted to the SEC recently, and indications of how the SEC will approach these are expected as early as 18th of October this year (note: little can be learned from the SEC’s recent choice to delay their decisions on four applications, as they were based on physical not futures). Should the SEC approve a bitcoin ETF for the first time, institutional investors will take comfort from a proverbial greenlight, with many expecting investor flows into the space to follow.
Both supporters and detractors have recently been likening bitcoin to the internet in 1997. Bitcoin has been growing at an annual rate of 113%, vs the internet’s growth at that time of 63%. Should bitcoin’s adoption slow to that of the internet’s, it would still lead to 1bn users by 2024 and 4bn users by 2030. With institutions such as Visa, Mastercard, PayPal, BNY Mellon, Morgan Stanley, Goldman Sachs, and JP Morgan to name but a few all reversing their stance against bitcoin, that isn’t looking likely.
On the 8th of September 2021, El Salvador became the first country to adopt bitcoin as legal tender, but as newsflow since then suggests, they will certainly not be the last. It is estimated that over 50% of the population are now using the government’s Chivo cryptocurrency wallet, compared with only around 30% having a bank account.
According to a recent report by the World Bank, approximately 1.7bn people remain without access to a bank account, however, 1.1bn of those own a mobile phone. There has long existed a narrative that cryptocurrencies can provide a solution to banking the unbanked. The World Bank also reported in 2018 that the overall global remittance market had grown to USD 689bn, including USD 528bn to developing countries. Alongside the commission-free Chivo ATMs in El Salvador, 50 commission-free Chivo ATMs have now been installed throughout the USA, where some 2.3m people from El Salvador descent live and work.
It is estimated that Salvadorans currently spend approximately USD 400m in remittance fees per year. With the new ATMs allowing individuals to send fast, commission-free payments across borders, we may be witnessing the first case study of blockchain technology improving on the outdated and often expensive financial system.
Ukraine also announced its plans to legalize bitcoin and cryptocurrencies. With Cuba, Brazil and Paraguay also all throwing their hats into the ring, how many more dominos fall will be key to watch in Q4 and beyond.
From an institutional perspective, our most recent survey representing USD 400bn of assets under management (AuM), highlights growing institutional participation. Average portfolio weightings in digital assets now represent 1.1% of AuM, although this varies considerably across different institutional investor types.
Of the survey respondents who said they had not invested, regulation (21%) was cited as the main reason for not investing. Closely linked to this were corporate restrictions at 19%. Volatility remains a big concern amongst investors. Encouragingly, very few of the respondents see digital assets as lacking fundamentals.
3. Macro environment
Signs of a potential inflationary problem are beginning to reveal themselves, most notably the tightening employment conditions (and consequent rise in wages) coupled with rising producer and commodity prices across the globe. However, investors remain divided, with the outlook for inflation falling into two schools of thought: those that believe the inflation effects are more transitory in nature, and those that see inflation rising to a point where it threatens economic stability.
Conceptually, it makes sense that bitcoin would be a hedge against inflation. It is what an economist would call a “real asset”—an asset of limited and predictable supply that is often priced in US dollars. Therefore, if the supply of US dollars is rising, or that of any other fiat currency, then it is likely that bitcoin will appreciate against those currencies, even if its purchasing power were to remain stagnant.
Data suggests that bitcoin is beginning to fulfill this inflation hedge role. Observing its price changes relative to changes in inflation over two-year periods since it was created in 2009, highlights that the relationship is improving, with a current R2 of 0.26 (since 2019). Incidentally, the relationship between bitcoin and inflation is currently better than between inflation and gold. Our recent article on bitcoin and inflation can be found here.
With energy prices rising, surging retirements from the baby boomer generation, and increasing risks of further wage rises, higher inflation remains a real risk. But we remain unsure as to exactly what will happen to inflation over the coming 5 years, consequently we see adding bitcoin and other real assets as a prudent measure to protect portfolios from the tail-risk of out-of-control inflation.
Bitcoin price scenarios
We have written extensively about the valuation of Bitcoin, but it is worth revisiting our total addressable market approach. Investment fund flows imply that BTC has begun to cannibalize gold’s market share, at present bitcoin represents 9.1% of gold’s market share.
We have recently seen SEC chair Gary Gensler acknowledge that bitcoin is now “a store of value that people wish to invest in, as some would invest in gold”, this further establishes its identity as a real asset.
As inflation threats in the near term are likely to further escalate, it’s not outlandish to see the bitcoin price achieve USD 100,000, which would represent only 17% of gold’s market value.
Coming towards year-end it is clear there is a range of potentially price-supportive events such as increasing regulatory clarity, rising inflationary risks, increasing adoption, and improving investor appetite – these factors are beginning to tick all the boxes for greater institutional investors participation in the asset class.
Paytm CEO Asserts Crypto Dominance, Claims Mainstream Adoption in 5 Years
Amid the wave of panic selling in India, Paytm CEO, Vijay Shekhar Sharma has opted a pro-crypto stance asserting the decentralized sphere’s inevitable development. Sharma spoke remotely at a virtual conference organized by the Indian Chamber of Commerce (ICC) this Thursday, where he levied crypto as Silicon Valley’s answer to Wall Street. While arguing in favor of crypto’s mainstream adoption, Sharma added that within the next five years, crypto will most certainly become part of our everyday routines, comparing it to the Internet, which was equally criticized during its initial days.
He also touched upon the theme of the Indian government’s potential crypto ban after the Crypto Bill is tabled during Parliament’s winter session, noting that governments are confused about crypto across the globe, however, that does not necessarily confirm a dead end for virtual currencies. Additionally, Sharma argued that crypto can never replace sovereign currency, like the Indian Rupee, yet Crypto’s growth is not linked with its potential to replace native currencies.
He said, “I am very positive about crypto. It is fundamentally based on cryptography and will be the mainstream technology in a few years like the internet which is (now) part of daily life…Every government is confused. In five years, it will be the mainstream technology.”
Indian Crypto Crash
India continues to stay in news given its latest crypto bill snapshot leak controversy that further triggered a crypto crash in the country. The market went into shock after speculations about a crypto ban in India spread like wild fire based on the crypto bill brief presented in the snapshot. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is among the 26 bills which are scheduled to get listed for the upcoming winter session starting on 29 November.
The speculations caused an overnight pain selling series, further resulting in the prices of Bitcoin (BTC) and multiple other leading altcoins to crash over 20% on exchanges like WazirX. Nevertheless, it did not impact the global markets, as they continued to maintain a stable price given the stats on Coinmarketcap remained close to unaffected.
New York’s AG Stays Busy, Two Crypto Platforms Shutdown Others Under Investigation
Per a press release, the office of the New York Attorney General Letitia James revealed actions against two crypto platforms. The companies have been ordered to stop their operations to “protect New York investors from exploitation by high-risk virtual currency schemes”.
The AG claimed that every company offering lending or other financial services must register with the Office of the Attorney General (OAG) operating within the state.
On a separate cease letter, issued by the Division of Economic Justice Investor Protection Bureau with the OAG, New York’s AG confirmed to be in possession of alleged evidence against the unnamed companies. The AOG has provided these entities with 10 days to stop operating in the state.
As seen in the documents, sign by John Castiglione Senior Enforcement Counsel for the AOG, the names of the companies, the products, and other details have been covered as the cease period is still ongoing. In addition, the AOG accused the companies of trading in Bitcoin and other crypto-assets allegedly without proper registration.
Finally, the AOG demanded the companies protect the data related to such activities and make it accessible for the government agency. AG James said that crypto platforms need to “follow the law” revealing that other 3 companies in the space are currently under investigation. James added:
My office is responsible for ensuring industry players do not take advantage of unsuspecting investors. We’ve already taken action against a number of crypto platforms and coins that engaged in fraud or that illegally operated in New York. Today’s actions build on that work and send a message that we will not hesitate to take whatever actions are necessary against any company that thinks they are above the law.
The Crypto Community Speculates, Who Was Shut down By AG James?
The office of Attorney General James has led a crackdown on the crypto industry in 2021. According to the release, crypto companies operating in New York were notified about a change in registration operations that requiring them to inform about their activities to the Investor Protection Bureau.
James seems to have the same stand on the industry as other U.S. government officials, including Secretary of the Treasury Janet Yellen, and several lawmakers in the country. These officials act on the idea that cryptocurrencies are mostly used for illegal activities.
Previously, James closed crypto trading platforms Coinseed after legal actions. Other companies with billions of dollars invested in crypto assets, such as Saraca Media Group and GTV Media Group, were shut down by the AOG.
In that sense, the crypto community has been speculating on the possible companies targeted by the AOG. Lending platform Nexo and Celsius are the top candidates, but the former company issued a statement on the accusations via their official Twitter handle:
Nexo is not offering its Earn Product & Exchange in New York, so it makes little sense to be receiving a C&D for something we are not offering in NY anyway. But we will engage with the NY AG as this is a clear case of mixing up the letter’s recipients. We use IP-based geoblocking.
No official statement has been provided by Celsus, at the time of writing. Until then, everything remains in the realm of speculation.
At the time of writing, Bitcoin trades at $62,208 with 2% profits in the daily chart.