How Institutional Investment Helped Bitcoin Reach $50K
In February 2020, the price of 1 BTC hovered around $8-9000. Exactly a year later, on the 21st February 2021, it skyrocketed to a new all-time high of $58,330.57. This increase has been largely attributed to a wave of recent institutional investment in Bitcoin. Hence, this article aims to examine exactly which factors were behind Bitcoin’s stratospheric rise, in a year plagued by pandemic-induced uncertainty for financial markets and investments as a whole.
Bitcoin is the most notable and popular of all cryptocurrencies. It was first developed in January 2009 by the still-unknown Satoshi Nakamoto as a response to the collapse of traditional currency and banking infrastructure following the 2008/9 financial crisis. Although originally intended as a replacement for fiat currency or an alternative medium of exchange, Bitcoin instead gained notoriety as a somewhat risky investment asset during the first decade of its existence.
For most of Bitcoin’s history, the price has fluctuated constantly with often-daily double-digit rises or drops, earning it the reputation of being ‘an extremely volatile’ component of any diversified investment portfolio. Bitcoin garnered mainstream traction during its price bubble of 2017, where it started the year at around $1000 and ended with an all-time high price of $20,089 in December. During the next two years, the price of BTC moved sideways whilst analysts and investors debated its value as an asset and new cryptocurrencies (termed ‘altcoins’) sprang up in its shadow.
The COVID-19 pandemic seemed to provide a new opportunity for larger-scale investors to seriously consider the value of Bitcoin. The response of many governments to the economic crises brought on by the onset of the pandemic in 2020 involved increased printing of money, leading to fears of inflation and weaker purchasing power of fiat currencies. These actions served to strengthen Bitcoin’s claims as a unique store of value, given that its supply is capped at 21 million. Whilst retail investors had principally sparked the price bubble of 2017, now institutional investors were taking note of Bitcoin’s potential instead.
Much of the February 2021 price rise in Bitcoin has been attributed to Elon Musk. The price of 1 BTC rose 20% and surpassed $38,000 at the beginning of the month after the Tesla CEO changed his Twitter bio to ‘#bitcoin.’ Proving his words carry weight, the richest man in the world purchased $1.5 billion worth of Bitcoin through Tesla on February 8, 2021 in an attempt to ‘further diversify and maximise returns on cash.’ In addition, Tesla became the first automotive company to announce it will begin to accept Bitcoin as a valid payment method from consumers. Read more on the blog about Tesla’s bet on Bitcoin here.
The New Gold?
Alongside Tesla, other major companies have also poured money into the lucrative cryptocurrency as of late. For instance, Square (who invested $50 million in October 2020) purchased a further $170 million of Bitcoin at $51,000 on February 25th due to an ‘increase in bitcoin activities and growth in customer demand’ on the platform. MicroStrategy, Galaxy Digital and BlackRock have also exhibited confidence in the cryptocurrency by investing significant sums throughout 2021. But, despite fears surrounding the shortcomings of fiat currencies and Elon Musk’s unwavering endorsement for Bitcoin, a more long-term factor may be able to explain this sudden burst of Bitcoin investment. That is, Bitcoin’s value as an alternative to gold.
One prevalent theory behind institutional investors’ increased appetite for Bitcoin purports that the digital currency is frequently being seen as an alternative to gold. Some fear that gold, which has long been one of the most popular risk diversification investments, is losing its status as a store of value due to a lack of popularity amongst Millennials and Generation Z. These younger investors are more likely to turn to novel, technologically innovative investments, like cryptocurrency, with Bitcoin being touted as a new ‘digital gold.’
But, will Wall Street follow suit?
An Uncertain Future
The verdict appears mixed.
Despite Morgan Stanley considering a $150 billion investment in Bitcoin and JPMorgan predicting BTC could reach a long-term price of $146,000, a recent report from the company highlighted that asset managers remain dubious over the digital currency’s future. In an interview with Forbes in January 2021, JPMorgan analysts asserted that most of the 2020 institutional flows into Bitcoin were merely speculative, a fact evidenced by the high volume of Bitcoin futures trading. Moreover, a look at the top five funds which hold the largest stakes in Grayscale’s Bitcoin Fund echo this sentiment, with the majority being disruptive technology or speculative funds. This is in contrast to the top five funds holding gold, which are more stable equity and allocation funds (Figure 1).
Furthermore, the owner of the world’s largest hedge fund, Bridgewater Associates, remarked, ‘[Bitcoin] could be a currency. It could work conceptually, but the amount of speculation…and lack of transactions [hinders that].’ Chief investment officer for Bleakley Advisory, Peter Boockvar, mirrored this view in claiming that it is ‘absolute nonsense’ to believe that Bitcoin ‘with a 10+ year history’ could stand a chance at replacing gold, ‘with [its] 5000 year track record.’ Undoubtedly, it will still take some persuasion for more traditional investors and asset managers to be sold on the value of Bitcoin as either a medium of exchange (currency) or a store of value (an investment).
Although institutional investment, spurred on by diminishing confidence in fiat money, Elon Musk’s endorsement and views of Bitcoin as an alternative to gold, skyrocketed BTC past $50k, it is uncertain whether the rise to $100k will be just as fast – should Bitcoin ever even reach that point. Regardless, after years of fluctuations and sideways corrections, the recent movement in the cryptocurrency market has proved an exciting time for enthusiasts and investors alike.