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The digital asset market is at an inflection point. The institutional adoption that’s been talked about for years is now happening on a large scale and it’s being driven by diverse narratives built around the unique utility and market properties of digital assets.
After a year that had already exceeded the vast majority of expectations, Bitcoin finished its three-year journey back to the all-time-high levels from late 2017. Only this time around, the price is based on much stronger fundamentals.
The rest of the cryptocurrency market is following in Bitcoin’s footsteps and many projects have made significant progress. 2020 has seen the rise of so-called Decentralized Finance projects, many of which are based on Ethereum. Ethereum itself recently launched its long-awaited 2.0 upgrade, opening the door to even more innovation.
Like the internet changed the landscape of communications, digital assets are showing they are ready to take their place in the financial system alongside traditional assets. They’ve been knocking at the door for a while, but now that door has been unlocked and seems primed to swing open. And while many cryptocurrencies show promise, Bitcoin remains the clear front-runner.
One of the prevailing narratives surrounding Bitcoin right now is its potential to act as a safe haven against inflation, as pointed out by Tudor Jones, who went on to say it reminds him of gold in the 1970s. This view is shared by CitiBank, who have published a report to argue in favour of Bitcoin’s gold hue in light of the devaluation of the U.S. dollar. But shielding against inflation is only one of the many possible ways forward for the leading digital asset.
If we take a high-level view, Bitcoin has two functions: as a payment system and as a store of value. In the past, the asset was often criticised due to the fact it has not yet reached the level of efficiency, usability or adoption required to challenge existing payment systems like Visa. Bitcoin-focused entrepreneurs and developers are slowly but surely overcoming these technical limitations, as innovations like the Lightning Network are already capable of sending Bitcoin anywhere in the world instantly and with fees a fraction of a dollar cent.
However, it is increasingly looking like Bitcoin’s effectiveness as a mainstream payment system may not be tied to its value and utility as a financial instrument. While it is still unclear whether we’ll ever be using Bitcoin to pay for our coffee, it is already clear that financial institutions are finding novel ways to incorporate Bitcoin into their business models. Not someday, today.
Investors such as Tudor Jones, who have moved a portion of their portfolio into Bitcoin, are not alone in their sentiment about the cryptocurrency. In June this year, Fidelity Digital Assets published its “Institutional Investors Digital Asset Survey” of 774 investors encompassing high-net-worth individuals, financial advisors, family offices, crypto hedge and venture funds, traditional hedge funds, endowments and foundations.
Of these, 36 pc currently invest in digital assets, 60 pc have a neutral or positive perception of them and 80 pc find at least one aspect of digital assets “appealing”. The three main reasons cited for their appeal are:
Unsurprisingly, Bitcoin is far ahead of the field when it comes to which digital assets these institutions are investing in. And it has proven to be an equally enticing proposition for the institutions’ clients.
Grayscale is currently the largest digital currency asset manager. When the Grayscale Bitcoin Trust enabled US citizens to own Bitcoin as part of their 401k, their total AUM experienced a drastic increase in a matter of months and now sits at just shy of 10 billion dollars.
Institutional investment has long been seen as one of the macro trends driving Bitcoin’s growth, but the lack of regulatory clarity surrounding the space combined with underdeveloped market infrastructure (compared to mature markets like stocks or FX) has, in the past, kept many institutions from entering the market.
Now, regulated, stable and reliable exchanges like Bitstamp have reached a point where their markets are built on infrastructure on par with traditional exchanges and the appropriate regulatory frameworks were developed in key jurisdictions. Bitstamp, for example, runs on a state-of-the-art matching engine created by Nasdaq, holds a Payment Processing License in the EU and a BitLicense in the USA.
There are a growing number of exchanges and services providers in the digital asset industry that have proven to provide a high level of service and obtained the necessary licenses to serve highly regulated players from traditional finance. So the future for institutional investment in Bitcoin and the broader digital asset class looks bright. But exposure to the market through investment is only one of the ways players from traditional markets are leveraging Bitcoin.
Bitcoin is a speculative asset traded with the intention of generating profits. But it also has uses outside of the speculative market. As a tool for wealth management, it is perhaps the best system we currently have for transferring large amounts of value across borders.
It is an incredibly robust tool for wealth transfer, with the biggest security threat by far being human error when sending transactions. Bitcoin itself, when used right, is very safe, much faster than legacy systems like SWIFT and incurs negligible fees when transferring large amounts of value.
Basically, you can use Bitcoin to send any amount of value (even billions) to anyone in the world within one hour (average transaction is completed in 10 minutes) and only pay around $2 in fees (at the moment, fees change depending on network congestion).
The other clear utility benefit is ease of storage. There are a number of institutional-grade custody providers wealth managers can work with to store their Bitcoin. But the beauty of it is that you can easily store it offline yourself as well, either by using a dedicated device called a hardware wallet or by simply writing the private keys used to access the assets on a piece of paper.
Once Bitcoin is stored offline, it is usually put into safes, similarly to gold bars. But unlike gold, you can store any amount of Bitcoin on a USB stick or on any piece of paper. If a wealth manager’s preference is to custody their own assets, either for privacy or security concerns, Bitcoin makes it not only possible, but simple.
And last, but not least, on the wealth-management front, the safe haven point comes into play once again. Bitcoin’s uncorrelated nature to fiat currencies makes it a potential hedge against inflation. Unlike fiat, which has no limit to supply, Bitcoin’s supply is set in cryptographic stone. Miners are hard at work at mining new coins, but once they reach 21 million BTC, mining is done and dusted. That is why many already speak of Bitcoin in terms of a deflationary asset.
Traditional players are finding success on digital asset markets by building their own financial products. The Chicago Mercantile Exchange (CME) was the first major exchange to offer Bitcoin futures trading, based on pricing from respected and regulated exchanges such as Bitstamp. A number of other exchanges have since followed suit, creating a growing (regulated) Bitcoin derivatives market that has, in turn, brought in new classes of investors, who wish to avoid directly buying and holding digital assets but seek exposure.
Another way we’re seeing institutions incorporate Bitcoin into their business models is by partnering with cryptocurrency exchanges to streamline the process of offering crypto exposure to clients. At Bitstamp, we call this Crypto-as-a-Service – we provide access to our orderly, highly liquid and regulated market and take care of all the processes needed to buy and sell Bitcoin, like order matching and custody.
The financial institution just connects to our API and adds crypto trading to the front-end interface to their existing platform. Or they can use this service as the basis for brand new apps, which is the approach Börse Stuttgart took with their dedicated crypto trading app, Bison, capturing a major chunk of the German retail digital asset investment market.
Providing their clients with access to Bitcoin markets can be a complex project for institutions, but with solutions like Crypto-as-a-Service becoming more commonplace, a lot of the technical and compliance-related challenges have been abstracted, allowing institutions to build their own digital asset offerings with low overheads and short development cycles.
One way to view the digital assets market today is to compare it to the internet in its early days. The infrastructure started to introduce new paradigms and norms into our lives, but there were plenty of sceptics and naysayers who said it wouldn’t last. The dot-com bubble burst and the sceptics thought they were proven right. However, today, companies like Google and Amazon are dominating the global economy and the internet has become an integral part of our lives.
Bitcoin’s version of the dot-com bubble burst in early 2018. However, Bitcoin’s price has already managed to recover and surpass its all-time-highs. This time, the situation is different. There are a number of strong forces proving the future of Bitcoin is brighter than ever. Unlike a couple of years ago, the value of Bitcoin now seems to be based on increasingly solid fundamentals, both as a developing payment system with seemingly limitless potential and as a financial instrument already bringing success to institutions in a number of ways.
The next Google and Amazon is likely already hiding among the myriad of businesses emerging in the digital asset space. But, as a whole, we are still in the early stages of this nascent industry’s development. For now, Bitcoin is the clear-cut leader of the digital asset space. It is providing clear use cases, being used as the basis for innovation by institutions and delivering salivating returns as an investment asset.
This growing range of utility and narratives surrounding Bitcoin is precisely what places the first and biggest digital asset at a tipping point – there are diverse forces driving its sustained success and the market seems to be responding in a positive way, its USD price rising by over 170% since January 2020.
The question then is, which of these narratives will prove to be the killer use case that once and for all cements Bitcoin’s place in the financial system. Or will it be all of them?
Provide simple and secure digital asset exposure to your clients by allowing them to purchase and sell digital assets within your own mobile or web platforms with Bitstamp’s Crypto-as-a-Service.
For more information, visit bitstamp.net or reach out to us at partners@bitstamp.net to get in touch with our team and implement a solution tailored to your needs.
