The attention and excitement around bitcoin over the last two years has generated far more questions than answers for institutional investors. Are hedge funds and other large investors really buying significant numbers of bitcoins? What purpose is it serving in their portfolio? Does this young and volatile asset class really deserve a strong place in long-term institutional portfolios?
Now, in September 2021, the respective answers to these questions are clear:
- Yes, and data confirms it.
- Think precious metals.
- Deservedly or not, bitcoin has been increasing in institutional investment portfolios since at least early 2020.
Not just for retail investors anymore
“We didn’t know their exact identities, but starting in mid-March 2020, we saw a very large increase in the amount of bitcoin being held by large investors who were buying at least a 1000 bitcoin each,” says Philip Gradwell, Chief Economist at Chainalysis, the premier blockchain data platform in the cryptocurrency industry. Since buying that many bitcoins meant investing more than $30 million at a time, it strongly suggests hedge funds and other deep-pocketed entities were at work.
“Beyond the size of the buys we see in the data, there was additional anecdotal evidence that these were large institutional buyers, and we know various investment funds, hedge funds and family offices have been buying bitcoin for quite a long time, and many more got involved in 2020,” Gradwell adds.
The first bitcoin buying wave
The buying wave that started in March 2020 – when blockchain data showed that more large investors were buying bitcoin in sizeable blocks costing more than $30 million each – accelerated in October and reached its crest in early February 2021, when bitcoin was topping $33,000.
In April 2021, hard evidence confirmed that these buyers were indeed institutional investors. This came from Coinbase, a prominent cryptocurrency platform with a service that essentially acts as a prime broker for institutions. Its first-quarter report revealed that of the $335 billion in trades the company did in Q1 2021, $215 billion came from institutional investors.
As the first bitcoin buying wave ended in February 2021, blockchain data showed that several of these large investors were selling and taking profits. “Since $20,000 was the last high-water mark for bitcoin during its bubble at the end of 2017, institutional investors really didn’t think it could go above $33,000,” says Gradwell.
The current bitcoin buying wave began in May
It did, of course. Bitcoin’s price famously surged in the spring, hitting its peak (to date) of $64,486 on April 14, 2021. While this surprised many investors who had sold when the price was around $30,000, the durability of the price was even more surprising: bitcoin was still trading above $55,000 well into May.
The price soon plummeted – dropping from $56,800 on May 11 to $35,800 on May 30 – partly due to escalating criticism about bitcoin’s environmental impact. Despite the negative news, institutional investors found this to be an attractive time to jump back in. “During the huge price fall in May, blockchain data showed that large investors were again buying significant numbers of bitcoin,” says Gradwell.
While many of these investors had viewed prices around $30,000 as a get-out signal just a few months before, bitcoin’s stratospheric soar in the spring made that price range look like a relative bargain to them by May 2021. “Seeing bitcoin’s price go beyond $64,000 in April gave institutional investors a lot of confidence, and by mid-May buying back in at around $35,000 seemed attractive and didn’t feel like a lonely trade,” says Gradwell.
Further, bitcoin showed relative stability after May’s collapse, maintaining prices between $30,000 and $40,000 for the next two months. Institutional investors also found this heartening and haven’t stopped adding to their holdings yet since they started rebuying in May, Gradwell adds.
“When the price started to fall on May 11, it fell very sharply and fast because of the loss of leverage in the system – but once that leverage level had dropped, bitcoin was at less risk of further rapid falls,” explains Gradwell. “Many investors perceived this as, ‘okay, we dropped off the cliff, but we found the level and it’s okay now to buy back in.’”
Institutional investors value bitcoin at $36,000
Both blockchain data of transactions and bitcoin’s pricing durability may be sending an important signal that could implications into 2022, says Gradwell. Namely, institutional investors now value bitcoin at $36,000.
“Our blockchain data shows they’ve been buying and holding at around $36,000 since May 2021, and that’s significant,” he says. “In fact, they’re actually willing to buy when the price exceeds $36,000, and they’ve continued to increase their holdings and haven’t sold yet. To me, this seems like institutional investors have almost reset their behavior back to the February market.”
Going forward, institutional investors will likely exert far more influence on bitcoin’s value than the millennial retail buyers who initially rocketed the cryptocurrency to fame, Gradwell points out. “The institutional investors have so much power in the market, their valuation almost becomes the price,” he says. And with the biggest banks – such as BNY Mellon, Morgan Stanley and Charles Schwab – all now offering (or about to offer) access to bitcoin and other cryptocurrencies to large investors, Gradwell is expecting institutional buying to accelerate.
Treating bitcoin like gold
Although it’s a relatively new asset class, institutional investors are using bitcoin in their portfolios in similar way they use one of the oldest: precious metals.
“Large investors are treating bitcoin like digital gold,” says Gradwell. “We’re now seeing high inflation rates, and they’re buying and holding bitcoin as a hedge against inflation and an opportunity to diversify.” Given bitcoin is a limited asset – there’s a finite number in existence –it has an element of rarity similar to precious metals, but offers a much greater potential for sharp growth because it’s a new technology that’s still evolving. “The gold industry is not changing,” Gradwell points out. “But with bitcoin, institutional investors get the scarcity of precious metals with the added possibility that technological innovations could significantly increase its value.”
Blockchain analysis allows smart decisions
When investing in any asset, whether it’s bitcoin or traditional choices, making strategic and risk-managed decisions naturally requires current and accurate data, strong analysis of market behavior and conditions, and a comprehensive view that can identify trends and opportunities early enough to make use of them.
With cryptocurrency, however, the best path for investors to perform this research and acquire the critical insights they need is a detailed analysis of the crypto’s blockchain data. This analysis can show the exact moves both institutional investors and retail buyers are making at any given moment, what digitized assets they’re holding, and how the wider market is responding to their behavior amid other potential signals.
“At Chainalysis, we have a dataset that’s similar to having a satellite view of all of the economic activity that’s going on in cryptocurrency, and we can see in granular detail what assets large investors are buying or holding and how they’re transferring them.” says Gradwell. “You can use our library of analysis and on-chain data API to conduct cryptocurrency research and make investment decisions based on hard facts and far-reaching data, while knowing where you are in a cycle.”
Learn more about using market analysis to develop your cryptocurrency strategy here.
