After Bitcoin broke through US$20,000 in December 2020, it has continued to create historical price highs in the near future.
Compared with 2017, the blockchain industry ecology is more specialized, and the upstream and downstream industries are gradually “institutionalized”, especially in North America. As of December 24, 2020, the Grayscale Bitcoin Trust Fund, which serves institutional clients, currently has nearly 530,000 Bitcoins under custody, accounting for 2.5% of the total, and its scale has increased by 89.58% since the beginning of the year. In the early days, it mainly served the business of its parent company DCG, and the scale is now expanded to many “new” institutional investors. This is also one of the most “talkative” topics after Bitcoin continues to break through historical high prices in 2020.
In fact, it is not just 2020. Every round of Bitcoin price increases is accompanied by the entry of institutions.
At the end of 2013, when Bitcoin broke through $1,000 for the first time, the Silicon Valley venture capital circle began to “enter” with high profile. For example, the co-founder of Union Square Ventures, a well-known Internet investment institution, once held a Bitcoin regulatory policy in New York in early 2014. At the hearing, the first to say “Bitcoin will subvert like the Internet and will continue to invest”. When the Bitcoin price exceeded $19,000 in December 2017, CME, the world’s largest derivatives exchange, took the lead in launching compliant Bitcoin derivatives trading services.
It can be seen that the “institutionalization” of the digital currency industry is not only a characteristic of this bull market, but a long-term trend.
The difference is that the previous few times the institutions that entered the market were mainly from the venture capital industry, but this year’s institutions are more diverse.
Common profit models of compliance agencies
Financial and Internet giants are the two pioneering forces that accelerate the “institutionalization” of the digital currency industry. In 2017, different buyers gathered together. In addition to common institutional buyers, such as hedge funds and venture capital, more institutional sellers appeared in the market this year, including mining services, mainstream mobile payment companies, Internet brokers, and traditional market makers. These platforms are trying to meet greater market demand.
The logic of the buyer’s market is relatively simple, buy and hold optimistic about the development of this field. The seller’s market generates profits by providing related services and has a relatively mature business model.
Institutional admission represents “service specialization”. MicroStrategy, a US business intelligence listed company that has been singing a lot on social media and buying a large number of bitcoins, uses Coinbase’s institutional seller transaction service to carry out order splitting algorithms to buy bits at a high frequency. The currency is not discovered by the market. MicroStrategy CEO Michael Saylor also claimed that he had done as many as 78,388 off-chain transactions to buy 21,454 BTC. Coinbase’s services have helped MicroStrategy save millions of dollars in costs. As the price of Bitcoin has increased, MicroStrategy’s initial trial has also been very profitable.
From traditional financial institutions to Internet companies in the circle, the profit strategy of the institutions does not rely solely on the unilateral rise in the price of bitcoin, and some institutions have never held bitcoin. For example, CME Globex, the world’s largest derivatives exchange, currently in charge of futures contracts with nearly 1.4 billion U.S. dollars in open interest. However, it has not held and hosted a real bitcoin in the past three years, but relied on receiving contract transactions. Both parties’ USD handling fees are profitable. The profitability of various institutions has changed from simply optimizing currency prices and waiting for them to rise, becoming more and more diversified, and having a positive effect on the industry.
3 types of institutions that buy and bullish Bitcoin
In addition to making profits from Bitcoin-related services, high-profile unilateral bullish bulls are not the case. For example, mobile payment giant Square bought about 4,700 bitcoins this year, and business intelligence company MicroStrategy also bought 70,000 bitcoins in batches this year. The company’s mid- to long-term asset allocation is disclosed in the company’s public financial report. CEOs have publicly expressed their optimism about its long-term development on social media. For example, the CEO of MicroStrategy once briefed Elon Musk on his Bitcoin investment experience on Twitter.
In addition to long-term Bitcoin longs in the institutions, there are also some speculative trading institutions, which also have a great impact on the market.
According to the analysis by Dovey Wan, the founder of Premitive Ventures, compliance agencies currently participating in the Bitcoin field are divided into three categories.
The first category belongs to speculative institutions, which are short-term. Most Wall Street institutions are of this type. For example, Ark Capital, which is born in a professional hedge fund, has a large trading volume. Whether it is cash arbitrage or professional quantitative trading, it is mainly used by Bitcoin in the short and medium term. Attracted by price fluctuations and liquidity, it is purely transaction-oriented.
The second category is investment institutions that earn the dollar standard. Many gray investors enter the bitcoin world through their trusts and then sell them during the profit cycle. They pay more attention to the investment return rate of the fiat currency standard.
The third category is allocation institutions. Recently, as listed companies of MicroStrategy classify Bitcoin as asset allocation, it may affect listed companies with more book cash reserves to manage their strategic reserves, because the price of bitcoin is not The trend of low correlation of US dollar assets, institutions of this type of configuration will tend to hold Bitcoin for a long time.
Some institutions may enter the market due to premium arbitrage
According to data analysis platform Skew’s research on its gray-scale premium arbitrage, the share of GBTC in the secondary market of Grayscale’s Bitcoin Trust has a long-term high price premium relative to the net asset price (NAV). The premium rate is 19%.
The Chicago Mercantile Exchange CME, which also faces compliance agencies, allows investors such as the “Renaissance Quantitative Fund” to use U.S. dollars to go long or short bitcoin futures contracts without having bitcoin cash. As the net short position of CME leveraged funds exceeded US$460 million, skew believes that hedge funds do not hold “naked short” bitcoin positions, but are arbitrage during the cash carry period of “gray premium”.
It is not only hedge funds that are attracted by the high premium of its bitcoin derivatives, but also many traditional market makers such as Akuna and Jump Trading. Market makers use algorithmic trading to provide liquidity for Bitcoin to obtain commissions from the trading platform. They do not predict the rise or fall of the price of Bitcoin. The reason for their entry may be that compared to traditional markets, they can obtain higher returns in digital currencies.
The large holders of GreyScale trust shares are BlockFi and Three Arrows Capital, which are a digital currency lending platform and a hedge fund investment company focusing on the blockchain field. They are the most active lending/borrowing parties in the market. .
Grayscale’s use of its trust premium seems to be able to obtain a high interest rate for both depositors and lenders of this size. The SEC document 13G shows that they are large trust institutions with more than 5% of the share.
In December 2020, the digital currency field once again frequently appeared on the front page of mainstream media. Like the 14 and 17 bull markets, more well-known companies with “famous” were added. Among them are listed technology companies that are optimistic about the long-term and join their asset allocation, and there are also a considerable number of short- and medium-term participants. Although the profits of participating institutions are not simply buying Bitcoin and waiting for the price to rise, from a long-term perspective, these participants have Conducive to this emerging ecology to become more vibrant.
