2020: The year bitcoin went institutional

On December 11, the author of a prominent but very private client financial newsletter noted that, although he had never written about bitcoin before, it was correct to say that institutional capital has now begun to reach its scale and that it would be strange to choose to fight . with e. Demand for bitcoin would now exceed supply.

Bitcoin saw, it would become an excellent metaphor for risk appetite in 2021 as a result.

Less than a week later, Coindesk confirmed that UK asset manager Ruffer had accumulated around £ 550m of bitcoin since November, representing about 2.7 per cent of the company’s AUM.

Ruffer’s move is now widely interpreted as the beginning of a major portfolio diversification trend for bitcoin. It seems that institutional money can no longer afford to ignore it. And it’s understandable that bitcoiners love it.

Price movements since then could certainly signal some kind of pragmatic acceptance of bitcoin in investment cycles:

© Courtesy of Coinmarketcap.com

So have these organizations gone crazy? Or are things really different now?

If they are, we believe it all depends on four key factors.

1. Bitcoin asset class status

Whether critics like it or not, it’s harder to argue about bitcoin’s status as an asset class. Yes, the cryptocurrency remains relatively useless as a medium of exchange outside the dark markets. But it is no longer clear whether that really matters. Bitcoin’s value has instead become associated with something more profound: its inability to go to nothing even though it has no central point of support or guarantor.

We would, we argue, be a function of two key elements: a) too much privileged capital in the system to let it go to zero and b) enough shorts in the system to ensure that short cover at zero would inevitably be supportive.

But it is also a function of another important phenomenon: the emergence of a rival tax authority to that of the hacker in the state.

This is important because of the longstanding economic argument against bitcoin as an effective repository of value has been that fiat money is eventually stabilized by the state’s ability to demand taxes in its own currency. As Dealbook noted in 2013, “money is inevitably a state instrument” and “no private power can raise taxes or pass laws to relax financial excesses”.

In 2020, though, that doesn’t seem quite right. Private “hackers” typically raise revenue from stealing private information and then demanding cryptocurrency in return. The process is called a ransom attack. It may not be legal. It may even be classified as extortion or theft. But to the mindset of those who oppose “big government” or claim “tax is stealing”, it doesn’t seem that different.

A more important consideration is which of these entities – the hacker or government – is more effective in enforcing their type of “tax collection” on the system. Naturally, the government has power, imprisonment and the law on its side. Yet, in recent decades, that has not been enough to guarantee effective tax collection by many types of individuals or corporations. Hackers, at least, seem at least relatively effective in extracting money from wealthy individuals or international organizations. In many cases, they also seem less willing to negotiate or cut deals.

In an increasingly polarizing world where a close majority of people do not recognize the legitimacy of their governments, a bitcoin fanatic could legitimately question what true legal extortion is anyway?

When there are well-established norms in flux, everything becomes a matter of perspective and it would be irresponsible for trusted agents to bet on only one horse.

2. Bitcoin fought the law and won the law.

For a long time, institutional investment in bitcoin has been hampered by strict investment mandates and regulatory compliance. Now that bitcoin has been formally recognized by many regulators, and regulated accordingly, this issue is much less of a hindrance than it used to be.

We used to argue that bitcoin’s submission to authority is a sign of the excellence of the core system. If bitcoin wanted to play with the big boys, it would also have to play by the rules they were governed by, thereby giving up its status as a renegotiation system. But there may be an important counterpoint that we did not consider. Entering into regulation bitcoin left its key “censorship-resistant” attributes, but it also paved the way for large-scale institutional investment.

And that is arguably more important than a temporary departure from the rules of the land. As with ESG investing, once you manage significant institutional funds, you have the power to influence the rules themselves through the threat of diversion. In the case of bitcoin, that might include changing the rules to favor censorship-resistant currencies.

If you consider institutional flows into bitcoin as a kind of diversion from ideology-driven fiat you can see that they are worth paying attention to.

3. Bitcoin volatility is a useful metric

When FT Alphaville’s Tracy Alloway (now Bloomberg) went on to bitcoin on June 6, 2011 it was a piddly $ 8.

At that time there was great disillusionment with the work of the core financial system thanks to the global financial crisis. And yet, even then, most commentators viewed bitcoin as a liberal pipe dream that was unrealistic about the importance of the state in supporting any formal currency system.

By June 13, Tracy had stumbled across bitcoin’s other major weakness: its inherent volatility.

In 2020, that volatility factor has not disappeared and remains bitcoin’s biggest nemesis in relation to wider public adoption (especially as a form of currency). But from a trading and asset perspective, there is some justification for embracing the idea that bitcoin volatility is also an important window into otherwise suppressed market forces. Central banks, rightly or wrongly, have worked hard to eliminate volatility from the financial system at the cost of balloon balances and central support for certain asset classes. A decisive move by institutional funds out of central bank systems and over to bitcoin stands to turn any related volatility into a measure of that restraint.

They say don’t fight the Fed because it will always win thanks to its infinite arsenal of cheap money. The idea is based on the assumption that cheap money is better than everything else. But if you’re an organization looking for a healthy rate of return, your organizational objective is to protect investor capital against things like negative interest rates.

The fact that organizations see bitcoin (in some ways the “hardest” of all currencies) as a mechanism to do so, is a sign of something important.

The bigger question is how do they see bitcoin offering returns after the inevitable capital appreciation honeymoon they own?

The answer comes in the one thing that can’t be easily handled until bitcoin stops appreciating: a large and vast debt capital market where corporations can easily raise capital for a real-world (not just digital) enterprise ).

The irony is that such a market can only really develop once the price of bitcoin stabilizes. And even after he did, some might argue why anyone would borrow in bitcoin instead of a much cheaper fiat? Bitcoiners may reiterate that similar questions used to be asked of the offshore securitization markets. They made mushrooms of size from the 1960s onwards anyway.

4. Bitcoin has successfully challenged scrutiny

Scientists invite scrutiny because they know nothing is a better testament to success than their inventions or discoveries challenge ongoing criticism.

Bitcoin may have started out as a belief system that is far from the scientific method, but in a round it has invited as much, if not more, scrutiny than even Donald J Trump in the last 12 years.

As much as critics may hate to admit, the fact that the system is still standing (if not thriving by some people’s measures) is important.

Yes, bitcoin has not yet proven itself to be more efficient or user-friendly than the conventional fiat currency. But it is no longer possible to deny his overall resilience. And because resilience is always part of bitcoin’s raison d’être that’s an important win for the potential challenger system. More importantly if you consider that institutional money feels that it can no longer afford to ignore it.

Related links:
At last, Bitcoin is finding logic in dooms day scenarios – FT