Crypto Research - Economic Insights

The situation

In 2012, market observers declared Bitcoin’s death, then in 2017 this death certificate was issued another 124 times over 12 months, then 41 times in 2019, and so far for 2022 its demise has been noted 9 times; yet, somehow it persists. Despite the recent dip of the speculative asset class, with Bitcoin, the dominant cornerstone of the market, its long-term holders have remained, as has the growth of institutional investors.

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The complication

A recent Federal Reserve report noted that in 2021, 12 percent of Americans held cryptocurrency assets in their portfolios. Well, who are the faithful? Crypto’s investor base is varied, but its origins are rooted in the zeal of retail investors, tied together with a shared ethos: “diamond hands”. Diamond hands refers to an investor who holds stocks adamantly, an investor who holds their position and refuses to sell. Currently, 65.9 percent of mined Bitcoin has been held for a year or longer. Arguably, this cultural stubbornness has only helped crypto grow market share, while also fostering a price floor for the asset over time. But, as Morgan Stanley recently noted, they are no longer the lone dominant trader.

What is a whale? A whale refers to a wallet address that holds a significant amount of cryptocurrency, usually 10 percent or more of the total number of coins issued. They can be an individual, or more likely an institutional investor, who holds an outsized impact within markets. As such, the investor community watches their movements with intrigue because they can significantly influence price movements.

Today, institutional players discuss the challenges of “how" and “where” to hold and access crypto assets, not the “why”. Ray Dalio estimates that at the end of last year, around 5 percent of total issued supply, being approximately $42 billion by January 2022 prices, were now held by institutional-level players. Corporations having Bitcoin on their balance sheets include Tesla, Block, and Coinbase, following MicroStrategy - Michael Saylor’s mobile software and cloud-based services company - which leads the sector in owning 124,391 coins in reserve. Crypto ownership it seems this is a foregone conclusion for much of the market, and as its operational difficulties, such as custodial and counter-party services, are settled, adoption amongst the stragglers will likely happen. And it does not have to be the ownership of coins outright, spot coin exchange traded funds or other derivatives, offer investors many avenues to gain investment exposure.

The resolution

The typical image of who you think is trading cryptocurrencies has changed. It is not some kid named Gordie, it's actually Gordon Gekko. Whether it be the utility of specific coins, or ultimately the promise of blockchain technology that attracts them, the growth and interest of institutional investors necessitates a reframing of the crypto market for policy-makers. Currently, the largest proportion of daily trading volumes is from institutional players, with much of market engagement coming from the trades between each other.

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Arguably, for the faithful retail class, this highlights a cultural concern. Crypto was supposed to be rebellious. Bitcoin supposedly held a paradigm shifting proposal, threatening to challenge the global financial system, not adoption. But out-walked Gekko and his “diamond hands”, after having cashed-out from a Fifth Avenue jewelry store.

Go deeper

Billionaire Tim Draper Doubles Down on $250,000 Bitcoin Prediction The Daily HODL

“It was one in 14 Bitcoin holders that were women. And now it’s something like one in six. And I think it will eventually be even. And the way it’s going to be even is women control about 80% of retail spending. And retailers haven’t yet realized that they can save 2%. And they usually run on very thin margins so that might like double their profits. They can save 2% just by accepting Bitcoin instead of taking a bank-issued credit card. And that can change everything.”

Evolution of Institutional Investors’ Exposure to Cryptocurrencies and Blockchain Technologies, Bridgewater Associates

“At the tip of the spear, a growing and meaningful share of less-constrained institutional investors, such as family offices, have already begun to allocate a small portion of their assets to outright crypto exposure. As shown below, well over half of high-net-worth investors in Europe and Asia have access to digital assets, directly or through financial advisors.”

Did Institutional Investors Crash the Crypto Party?, Financial Times

“Chainanalysis very roughly estimates that institutional investors (anyone with more than $10mn to play with) accounted for 44 per cent of total crypto trading at the end of the second quarter of 2021, up from 8 per cent less than a year before. Analysts at data provider VandaTrack point out that much of that interest centres on Bitcoin and Ethereum”