Original title: “OKEx Research: Why are more and more high-net-worth individuals and institutions buying Bitcoin? 》
Written by: OKEx Research
Recently, British actress Maisie Williams, known for playing Arya Stark in “Game of Thrones”, asked her 2.7 million fans on Twitter if they should invest in Bitcoin. For a while, it attracted heated discussion, and even Tesla CEO Musk came to tease. According to Twitter statistics, more than 100,000 people responded, and about 51% of them suggested that she invest in Bitcoin.
In fact, since the second half of 2020, the list of celebrities who hold Bitcoin has grown longer and longer: Katherine Wood, founder of Ark Capital, known as the female version of Buffett, Liang Xinjun, founder of Fuxing Group, and Jack, Twitter CEO. Dorsey, Paul Tudor Jones, a well-known Wall Street trader in charge of the Tudor Fund, Elon Musk, founder of SpaceX and Tesla…
In November 2020, “Game of Thrones” actress Maisie Williams asked netizens if they wanted to buy Bitcoin
Similarly, we will also find that since the second half of this year, more and more institutions have begun to buy Bitcoin. For example, the US mobile payment giant Square bought 50 million U.S. dollars in bitcoin, accounting for 1% of the company’s total assets; asset management company MicroStrategy announced that it had purchased a total of 425 million U.S. dollars in bitcoin. There is also a long list of this:
Table 1. List of some institutions that buy Bitcoin
In recent years, with the increasing media coverage of Bitcoin, the public has a certain understanding of it. But even so, when we read the comments below the Bitcoin-related reports, most of us will leave a message: “The largest bubble in human history”, “Electronic Ponzi scheme” and other words. In fact, these comments also represent most people’s impression of Bitcoin. So when people see more and more high-net-worth individuals and institutions starting to buy Bitcoin, they will inevitably be confused: why invest in such a thing (smirking emoji).
Before answering this question, we need to give Bitcoin an accurate and clear positioning: From the current point of view, Bitcoin is a high-risk alternative investment; it has never been seen that Bitcoin will gradually become digital gold.
“High risk” is because the current Bitcoin volatility is very large, and its average daily rise and fall is much higher than that of the S&P 500, gold, etc.; the current positioning is “Alternative Investment” because of the relative In terms of traditional stock and bond investment, encrypted digital currency investment is still a minority. It is said that Bitcoin will become “digital gold” in the future because Bitcoin, like gold, has limited supply and has deflationary properties. Although the current price of Bitcoin is extremely unstable, more and more people will realize the meaning of Bitcoin in the future. Later, it will become an alternative asset like gold (Ray Dalio).
After understanding the current and future investment positioning of Bitcoin, we will understand why more and more high-net-worth individuals and institutions begin to buy Bitcoin for the following three reasons:
The scale of assets owned by high-net-worth individuals/organizations is different from ordinary people
At the beginning of the article, we will find some interesting phenomena: Paul Tudor Jones of the Tudor Fund announced that 1%-2% of the asset size will be used to invest in Bitcoin; the US mobile payment giant Square bought 1% of company assets in Bitcoin. Similarly, Sun Zhengyi, CEO of SoftBank Group, who invested in Bitcoin in 2018, also said in an interview with the media recently that a friend once told him that he should invest 1% of his personal assets in Bitcoin.
Bitcoin, as a high-risk alternative investment, also often means high returns. For high-net-worth individuals/organizations, the scale of assets is relatively large, so they can invest 1% of their assets in some high-risk alternative investment products. If the investment is right, they will get a return of tens or even hundreds of times; If the bet loses, it will only lose 1% of the assets.
This is why ordinary people and high-net-worth individuals have different attitudes towards investing in Bitcoin. The same 1% asset investment, even if the same 20 times high-yield return, is very different for ordinary people and high-net-worth individuals: ordinary people with a wealth of 100,000 yuan can only obtain 2 A return of 10,000 yuan; for high-net-worth individuals with 10 million assets and 100,000 investment, they can get a return of 2 million. Depending on the scale of wealth, the investment logic of the two parties will also differ.
The need for diversified investment of high net worth individuals / institutional investors
For high-net-worth individuals, especially institutional investors, due to the huge amount of assets, they will not rely solely on simple descriptive research and empirical operations when making investments. They must make refined and professional investments. The principle of methodology is based on Markowitz’s portfolio selection theory.
For the best investment portfolio, it must be the portfolio with the smallest risk (variance) at a certain level of return. In order to minimize the risk (variance), we need to diversify the investment, especially choosing those that have little correlation, or even Negative assets are configured in combination. Buffett has a famous saying: Don’t put eggs in a basket, it is the best interpretation of this theory.
Investment portfolio helps reduce unsystematic risks
Bitcoin has high risks and high returns, and the correlation coefficient with other major assets (such as gold, stocks) is not very high. For high net worth individuals/institutional investors, adding Bitcoin to the asset pool can optimize assets Configuration.
Table 2. Correlation coefficient matrix of various assets in 2020
The Bank of China Global Strategic Securities Investment Fund (FOF), which was recently exposed by the media, bought the Bitcoin Fund (GBTC) under the Grayscale Fund in 2019 in order to realize the need for diversified investment in portfolio assets. Judging from the 2019 semi-annual report, the GBTC fund shares purchased by the fund accounted for 2.9% of the fund’s net asset value, and it was also among the top ten institutional investors of GBTC funds that year.
Of course, there are not a few institutional investors like the Bank of China Global Strategic Securities Investment Fund (FOF). According to the data disclosed by Grayscale Funds in the third quarter of 2019, 81% of its funds came from institutional investors, and most of them were hedge funds. Of course, this is also related to the high premium of grayscale funds. Many hedge funds conduct arbitrage activities by holding fund shares while shorting Bitcoin on CME.
Macro factors: negative interest rates, high inflation expectations
In November 2020, Bitcoin returned to a high of $19,000 after nearly three years, setting a new record for the highest price in history. More importantly, Bitcoin has risen 150.66% since this year. In comparison, during the same period, gold only rose 23.2%, the S&P 500 rose 11.72%, and the US dollar index fell -4.37%. If nothing else, Bitcoin will rank first in the performance of various asset returns this year.
Figure 1. Performance of various assets since 2020
Many market participants attribute the rise of Bitcoin this year to price increases caused by production cuts. However, this round of Bitcoin’s rise is just a simple historical repetition of the production reduction cycle? In the same way, people are often confused, why since the second half of this year, institutional investors have suddenly gathered together to start investing in Bitcoin, and why this time is not the beginning of the year or last year? So why should institutional investors invest in Bitcoin?
The US MicroStrategy company may be a typical case, and it also represents the views of most organizations. MicroStrategy purchased approximately 40,000 bitcoins (currently valued at approximately US$800 million) in the second half of this year, and recently announced that it will issue US$400 million convertible bonds to purchase bitcoins. In an interview with Bloomberg in September this year, the CEO of MicroStrategy said: “The average annual inflation rate in the future will reach 20%, which will greatly reduce purchasing power. The risk of holding Bitcoin is less than holding cash. At present, Bitcoin is The only asset that allows us to get positive returns.”
In 2020, we have experienced the “pandemic” and “negative oil prices” black swan events that have not been seen in a century. In order to cope with the economic recession brought about by the epidemic, countries have adopted quarterly loose monetary policies and interest rates have been lowered repeatedly. At present, the European Central Bank has implemented it. Negative interest rate policy, and the US federal benchmark interest rate has also been close to zero.
Figure 2. Basic interest rates in Europe and the United States in 2020
On the one hand, affected by the epidemic, the recovery of the global economy will slow down in the coming year; on the other hand, the central bank’s ultra-conventional monetary easing has pushed up inflation expectations in the financial market. In an economic environment of high inflation, low growth, and negative interest rates, in order to avoid the risk of damage to the nominal principal, investors’ demand for hoarding cash has naturally evolved into a demand for gold. Gold and a substitute for gold—bitcoins—have become market hedges Assets with higher-than-expected inflation.
It can be said that since the second half of this year, behind Bitcoin’s popularity among high-net-worth individuals/institutional investors, there are not only Bitcoin’s own factors that are gradually accepted and recognized as an alternative investment product with considerable returns; there are also factors related to the global macroeconomic situation. Profound changes, the economic slowdown under the impact of the epidemic, and the background of the era of high inflation expectations. Every new thing needs a certain amount of time from its birth to its popularization. Three hundred years ago, people were still full of curiosity about stocks; a hundred years ago, venture capital was still non-mainstream; more than a decade ago, Buffett “cannot understand technology stocks.” Although Bitcoin is still full of controversy until now, it is undeniable that more and more people are choosing to invest in cryptocurrencies. In the foreseeable next 20 to 30 years, cryptocurrency as an alternative investment product may also become a mainstream investment product.
