Bitcoin moves to replace gold as hedge funds enter
Wall Street hedge funds are driving demand for Bitcoin, potentially creating a supply shortage.
Signs say Bitcoin is developing into digital gold and gaining traction among institutional investors. The momentum that Bitcoin is building as a genuine asset class is catching many off guard. Even the market is getting caught off guard and there are signs that supply for Bitcoin is being outstripped by demand.
An influx of institutional investors is reinforcing existing market sentiment that Bitcoin is a bona fide store of value. In recent months some Wall Street analysts have been announcing their intent to develop a digital assets portfolio which is causing extra daily demand worth around $2.5 billion more since September 2020.
The Greyscale Bitcoin Trust, which has a $10.1 billion holding of Bitcoin, has recorded new investments of up to $2 billion since October. That stands in contrast to more established gold-backed exchange-traded funds which have witnessed a $7 billion drawdown in the same period, as estimated by JP Morgan.
During Bitcoin’s first major bull run in late 2017 many Wall Street figures such as Jamie Dimon CEO of JP Morgan and Warren Buffet famed investor and President of Berkshire-Hathaway publicly criticised Bitcoin as a “fraud”, “worse than tulip bulbs” and “worthless” to the extent that they “never will” invest in it.
Ray Dalio, Founder of Bridgewater and Associates which is the largest privately owned wealth management company, poured scorn on Bitcoin describing it as a “bubble” in September of 2017. After Bitcoin reached its all-time high of around $20,000 it faced an equal deflation languishing at around a quarter of its peak from January 2018 right up until 2020.
Writing to followers in a Reddit Ask Me Anything in December of 2020, Dalio’s remarks show a turnaround in his stance towards the developing asset class. Dalio claimed that over the last decade “bitcoin (and some other digital currencies) have established themselves” as alternative stores of wealth with both “similarities and differences” to gold.
Supply side pressure on Bitcoin
More so than during the Great Financial Crisis of 2007 to 2009, the quantitative easing measures in response to COVID-19 have caused institutional investors to price in the potential for inflationary pressures on the US dollar. As a result of this, Bitcoin has been looked on more favourably as both a store of wealth and a possible hedge against inflation, particularly throughout the second half of 2020.
In the second half of 2020 there have been a couple of key influences on Bitcoin and the cryptocurrency market in general. First, the price of Bitcoin has rallied near to its all-time highs of $20,000. Second, and most importantly, institutional investors are putting their money where their mouths are which could be what is causing an average $2.5 billion greater daily volume of Bitcoin transactions.
One factor that could be contributing to a large increase in demand is the fact that Paypal which has 300 million active users began offering Bitcoin transactions with its custodial partner Paxos. Pantera Capital said that “When PayPal went live, volume started exploding.” Going as far as to say that the added transactions imply that “within four weeks of going live, PayPal is already buying almost 70% of the new supply of bitcoins”.
However, if Paypal and other players on the global financial scene are creating huge demand for Bitcoin it isn’t showing in the total amount of daily transactions. This suggests that the 300 million Paypal users aren’t transacting with Bitcoin just yet. Rather, Paypal and companies like it may be acquiring Bitcoin in large amounts for future liquidity purposes.
According to data provided by theblockcypto.com, since the September quarter of 2019, daily transactions have averaged mostly between the range of 300,000 to 350,000. Importantly, this shows relative stability for an asset which is notorious for its volatility. In addition, there has been no significant spike in daily transactions which would be consistent with a large influx of users in the case of Paypal.
In spite of that, it can be seen that in the year from the September quarter 2019, daily transaction value remained at around $2.5 billion on average. That was until after the September quarter 2020 saw a huge increase, doubling the previous average at its peak of $5 billion of daily Bitcoin transactions.
As at the time of writing, Bitcoin was trading at $17,965 down on its opening high of $18,483 which is a reduction of 2.8% on the day and nearly $2,000 shy of the 1 December high of $19,832.
Interested in cryptocurrency? Learn more about the basics with our beginner’s guide to Bitcoin, see how to keep your crypto safe with our end to end guide to cryptocurrency security and dive deeper with our simple guide to DeFi.