Cryptocurrency – all grown up

by James Stickland, chief executive of Elwood Technologies

With a market capitalisation of more than $1.2 trillion for Bitcoin alone and in excess of $2.8 trillion for digital assets combined, cryptocurrency has progressed from “new market” phase and is now reaching maturity.

How did it get here? Increased institutional adoption, improved infrastructure, and the approval of the first Bitcoin ETF (exchange-traded fund), all played a part in helping secure digital assets a seat at the grown ups’ table.

Identifying the moment when a market reaches maturation isn’t an exact science. New markets emerge with varying degrees of traction – the futures market is a prime example. Although futures date back to the formation of the Chicago Board of Trade in 1848; they only began to be widely traded around two decades ago, becoming increasingly attractive to investors since. In 2017, it was unclear whether cryptocurrency would emerge as a legitimate asset class. There were certainly not many believers that the market would reach maturation in such a short period of time.

Cryptocurrency’s impressive growth

Cryptocurrency’s well-publicised rallies and falls of previous cycles appear different from this latest boom. Unlike the frenzied heights of 2017, in which retail investors drove the Bitcoin bubble, institutional investors today take the market seriously. Hedge funds, endowments, family offices, and private corporations are all investing in digital assets. 

While many leading financial institutions were experimenting with the technology in 2018, the second half of 2020 was when we saw the push to this transition. Business intelligence firm MicroStrategy announced its first BTC investment in August, making an initial $250 million purchase. The forward-thinking tech company led by CEO Michael Saylor went on an aggressive buying spree, investing a total of $3.16 billion to date to increase its BTC holdings to 114,042 BTC (approx. $7.3 billion at the time of writing).

MicroStrategy was soon followed by payments company Square, allocating 1% of its total assets into BTC ($50 million) in October. Around the same time, prominent global investors and hedge fund managers, including Stanley Druckenmiller and Paul Tudor Jones, expressed support for Bitcoin.

Meanwhile, traditional financial institutions that had either shunned or downplayed Bitcoin in 2017, including Goldman Sachs and Morgan Stanley, changed their positions. They recently offered exposure to digital assets to their wealth management clients. Several other global financial institutions, such as BNY Mellon, have also announced their intention to provide digital asset custody services after receiving the green light from the OCC (Office of the Comptroller of the Currency).

A perfect macroeconomic storm 

Macroeconomic factors have also helped drive institutional adoption of cryptocurrency as investors seek alternative assets. Unprecedented multi-trillion-dollar stimulus packages in response to the pandemic have led to an uncertain environment of rising inflation and low interest rates. 

Investors holding cash or cash-like assets, such as treasuries, are receiving near-negative yields – with any potential returns quickly wiped out by inflation. When Saylor spoke about his decision to allocate MicroStrategy’s assets into BTC, he explained they were fast losing value in the current economic climate; “We really felt we were on a $500 million melting ice cube,” he said.

The argument for BTC as digital gold, a store of value, or an inflation hedge, grows more compelling when faced with ballooning money supplies and a rapidly debasing global reserve currency. Not to mention the duty of corporate treasurers to provide investors with returns in a low yield environment. Digital assets have undeniable potential for capital accrual, with Bitcoin being the best-performing asset of the decade by several country miles.

Approval of a Bitcoin ETF

In October, a watershed moment occurred for cryptocurrencies, and arguably one of the clearest indicators of market maturation. After eight years of waiting, the first Bitcoin ETF in the US, ProShares Bitcoin Strategy ETF, finally received SEC approval and began trading, debuting as the second-highest traded fund in history and the first to reach a trading volume of over $1 billion in just two days.

Closer to home, other encouraging developments occurred in that same week, as Jacobi Asset Management received approval from the Guernsey Financial Services Commission (GFSC) to launch the world’s first ‘tier one’ physically-backed Bitcoin ETF custodied by Fidelity Digital Assets. Pending Financial Conduct Authority (FCA) approval, Jacobi will list its ETF on Cboe Europe, one of the largest pan-European equity exchanges.

The approval of a Bitcoin ETF sends a powerful message this asset class is here to stay, legitimising the cryptocurrency market and helping attract more institutional investors. It’s also a step in the right direction that could eventually pave the way for the approval of a physical Bitcoin ETF in the US and Europe, which would be a catalyst for exponential market growth.  

Improved infrastructure for institutional investors

Cryptocurrency infrastructure, typically cumbersome and not designed for large investors, is also improving. This is another key sign of markets maturing, as high-security, enterprise-grade software that meets the exacting standards of institutions becomes available. 

Even existing cryptocurrency platforms are responding better to the influx in demand, with far less downtime than before. Popular brokers like Robinhood are offering digital assets trading, rather than forex or futures to their customers. This highlights how cryptocurrency has leapfrogged over these two markets in a short space of time. 

We’re seeing a shakeup of the digital asset custody landscape too, with increased institutional-grade custody solutions available as banks and large institutions throw their hats into the ring.

At this point, it seems likely digital assets are here to stay. With a far more robust framework, improved infrastructure, and greater regulatory clarity, more institutions are finding ways of allocating into digital assets. They can now do so with greater confidence in the longevity of the market.