Analysis: On the flip side of Bitcoin’s institutional support
2020 was undoubtedly a phenomenal year for digital assets. With Bitcoin at the forefront, cryptocurrencies witnessed an influx of institutional investors who gobbled every available bitcoin sell order. The rising demand for Bitcoin from institutional investors led to positive price actions in the last quarter of 2020. From MicroStrategy to PayPal, Square, MassMutual, SkyBridge, and Grayscale, it appears Bitcoin is finally going mainstream.
With the year almost ending, bitcoin’s market cap currently sits at over $500 billion, with the digital asset controlling more than 70% of the crypto market share. With a market cap of $0.5 trillion, Bitcoin’s valuation had surpassed financial behemoths such as JP Morgan, Goldman Sachs, and CitiBank, as of press time.
But while the entire crypto space is agog with the fact that big money is flowing into Bitcoin and prices are hitting new highs, no one is thinking about the other end of the scale. The inflow of “big money” comes at a cost.
Is Bitcoin really going mainstream?
Although it seems like Bitcoin is gaining mainstream adoption, one could argue that the recent events are merely an exodus from traditional finance. Most of the recent institutional participants look to Bitcoin as a viable store of value and an option to diversify their portfolio. This right here is a problem with institutional adoption.
The Bull Run of 2017 was primarily fuelled by retail investors. But this time with players larger than retail whales, this characteristic is eroding. Data reveals that 16.12% of Bitcoin’s current market cap is now being held by institutional investors. Furthermore, as reported by BTC PEERS, 78% of Bitcoin is now illiquid, with only $4.2 million worth of Bitcoin being in circulation for buying and selling.
Grayscale, for instance, has a Bitcoin trust that constitutes $16.3 billion out of its $19 billion assets under management. With Grayscale out of the picture, up to 7.52% of the bitcoin in circulation is being controlled by other institutions. Surprisingly, it took most of these giants only a quarter to accumulate this much.
At this pace, Bitcoin could reach $100,000 per coin. But one cannot deny the fact that these institutions like everyone else are in for the profits. A question no one is asking is what happens when an institution like Grayscale decides to take profits or de-risk their portfolio? This could spell mass dumping. A classic example of this is Bitcoin’s price dump in 2018 when Mt. Gox liquidated around $312 million worth of Bitcoin through a Japanese exchange – BitPoint.
If crypto regulations become unfavorable, there is no doubt that these players will quickly take profits. Ripple is a clear case study in this regard. A mass exodus of institutional players out of Bitcoin could mean the death of the digital currency.