Early in Bitcoin’s existence, the cryptocurrency was shunned by institutions as a worthless asset. In fact, the only group of people who believed in Bitcoin’s true potential was its core community. Even individuals like you and I thought of it as a passing fad. Boy, were we, and every institution that looked the other way wrong! What we are seeing today is a tectonic shift in the perception of Bitcoin, especially amongst major institutions.
Today, institutions are queuing up to buy Bitcoin, with MicroStrategy, Tesla, and block leading the way, thanks to Bitcoin’s stunning performance that far outshines any other asset class in existence. Data has confirmed that institutions and hedge funds are lapping up Bitcoin, but the real question is why they are buying this highly volatile asset? Read on to find out!
Investor interest in Bitcoin started seeing a significant uptick in March 2020, with prominent investors picking up Bitcoin in large numbers. By April 2021, evidence that institutions were indeed purchasing Bitcoin emerged when a prominent exchange revealed in its quarterly report that out of the $335 billion trades processed by it in Q1 2021, $215 billion came from institutional investors.
As of 2021, institutional investors own almost 8% of the total supply of Bitcoin, and while their value may have taken a hit thanks to recent market events, institutional investors could use this opportunity to purchase more Bitcoins as they buy the dip. Companies such as MicroStrategy, Tesla, Square, and others regularly purchase Bitcoin when the price drops. According to Bitcoin Treasuries, 68 institutional investors have invested in Bitcoin, with some holding as low as 3 BTC, while others, such as MicroStrategy, hold over 100,000 BTC. Grayscale holds the most Bitcoin, with 654,885 BTC, accounting for over 3% of the total supply.
To understand why institutions are buying Bitcoin, we need to understand why it has value. Bitcoin does not have a government or a central bank backing that would promote its use. However, the cryptocurrency does share some attributes with traditional fiat currency and gold. It is scarce, fungible, and portable. We could understand the similarities better through the use of a simple chart and understand why Bitcoin has value.
The re-emergence of inflation concerns has renewed interest in Bitcoin. Traditionally, gold and real estate have always been viewed as a hedge against inflation. However, gold’s history as a good hedge against inflation is rather muddy, and after the housing bubble burst in 2008, real estate was also viewed with suspicion. Today, Bitcoin is viewed as the best hedge against inflation by institutions and investors, earning it the title of “Digital Gold.” Like gold, it too has a finite supply, meaning that as demand for the asset increases, so will the price.
Now, there are two sides to the argument. An inflation hedge is an asset that moves in the same trajectory and goes even beyond the Consumer Price Index (CPI), which measures rising prices. If you look at Bitcoin’s recent performance, the cryptocurrency has lost over 50% of its value since reaching its all-time high. However, a good hedge against inflation is an asset that tends to grow in value greater than the prevailing inflation rate. By that metric, Bitcoin has undergone a staggering price increase, which is why investors consider it one of the soundest assets known, and the best hedge against inflation.
Portfolio diversification is another reason why institutions are buying Bitcoin. Historically, the cryptocurrency has outperformed almost all assets, making it a valuable addition to any portfolio. Increasingly, “smart money” is being allocated to Bitcoin as a portfolio diversification strategy, thanks to the changing perspectives of hedge funds, family offices, and money managers towards the asset. Regular surveys have indicated that a growing number of institutional investors are allocating a fairly significant percentage in their portfolio to Bitcoin. Another survey conducted by Fidelity revealed that seven in ten institutional investors were expecting to invest in Bitcoin and other crypto-assets.
Originally envisaged as a medium of exchange, Bitcoin’s evolution has made the cryptocurrency particularly appealing to institutions that are now purchasing Bitcoin at every opportunity. Despite recent market volatility, data has indicated that institutions are looking to purchase more Bitcoin as inflation continues to rise, thanks to the crippling effects of the pandemic and world economies coming to a standstill.
With institutions buying Bitcoin, now could be the perfect time to purchase your own. If you are based in the Middle East, you can do so through the Rain exchange. Rain is secured by the Central Bank of Bahrain (CBB). Simply register and start trading!
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