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Institutional Money and Bitcoin

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Bitcoin has seen an amazing rise in 2017, handily beating returns from all other asset classes as the value of 1 bitcoin has risen from a $992.95 (per Coinbase data) closing price on January 1, 2017 to the current value of $12,875 on December 6, 2017. That’s better than 1,200% in one year, and since the year isn’t over yet we could see additional gains by December 31, 2017.

By contrast, the S&P 500 is up by just 17% and the value of gold is up just 9.9%. Bitcoin has been known to gain that much in a single weekend, indeed in a single day in some cases.

Given the spectacular gains from bitcoin (and other cryptocurrencies), it’s no surprise that investors are increasingly turning their attention to Bitcoin. The search term “Bitcoin” is now the most search for on Google, and we are on the verge of seeing Bitcoin futures contracts being traded on the CBOE and CME, with similar plans for Bitcoin futures coming from Japan, and from the Nasdaq. All of this interest from institutional investors is certain to have a huge impact on Bitcoin and the overall cryptocurrency markets. Let’s look deeper.

Bitcoin Becoming a Mainstream Investment

Certainly the emergence of Bitcoin futures highlights its move into the mainstream of the financial world as an investment. While media recently has focused on the launch of Bitcoin futures, it’s not as well known that 2017 saw the emergence of dozens of cryptocurrency focused hedge funds. According to Autonomous NEXT, a financial technology research house, 84 so-called crypto hedge funds have been launched this year, taking the total to 110 with about $2.2 billion in assets altogether.

Private banks are also showing interest in Bitcoin and other cryptocurrencies as an investment alternative for their high-net-worth clients. Leading this charge are the private Swiss banks, with Falcon Bank beginning to provide Bitcoin asset management to clients this past July, and Swissquote launching an actively managed Bitcoin fund in November.

November also saw Europe get its first Bitcoin mutual fund after French investment firm TOBAM launched the TOBAM Bitcoin Fund on November 22. It’s hard to imagine that the U.S. and japan will be far behind in launching their own Bitcoin focused mutual funds, and once Bitcoin has become accepted as a mainstream financial asset, it can’t be long until funds begin investing in the smaller, and more volatile, altcoins such as Ethereum, Litecoin, Monero, Dash, NEO, IOTA and hundreds of others.

Driving all of this will be the Bitcoin futures products to be released this month, which will allow these types of hedge funds, mutual funds, and other investment vehicles to hedge their risks in the cryptocurrency markets. This is actually the most interesting aspect of the release of Bitcoin futures, and I imagine it will open the floodgates of retail and institutional money into Bitcoin in the coming years. In fact, TD Ameritrade, with nearly 7 million funded trading accounts, has already announced they will begin offering Bitcoin futures trading to their customers immediately.

“What’s exciting to us about it is it provides a two-sided market. With natural buyers and sellers, that helps to put a more reasonable volatility on the product.” – JJ Kinahan, chief market strategist at TD Ameritrade

Institutional Money in Bitcoin

It’s hard to say how much money institutional investors have put into cryptocurrencies to date. It’s very likely that Bitcoin has seen billions of institutional money flowing in over the past week in anticipation of the launch of Bitcoin futures. I don’t think the massive run-up in price can be explained in any other way, as I don’t believe individuals have been putting that much additional capital into cryptocurrencies.

We can make a good estimate of the holdings of the current crop of cryptocurrency hedge funds though. Based on estimates from Autonomous Research, the current 110 cryptocurrency hedge funds have a combined $2.2 billion in assets under management. That means with Bitcoin’s current market cap of $232 billion these funds have just a bit less than 1% of the bitcoin in circulation.

There are other funds that have publically stated they are adding Bitcoin to their portfolio allocations throughout 2017. These funds more than likely don’t make up more than another 1% of the total supply of Bitcoin. And even if the total investment by hedge funds and the like equals $20 billion, that’s still less than 10% of the current supply of Bitcoins, and far less than these funds have at their disposal. The upshot of that is that there is a mountain of money that could still come into Bitcoin and cryptocurrencies.

Mainstream media may be crying about a Bitcoin bubble, but the truth of the matter is that Bitcoin likely is just getting started, with such a small amount of institutional money currently involved with cryptocurrencies. Consider this 2011 study by the London Bullion Market Association showing the daily trading volume in gold only on the London Exchange is roughly $240 billion – the same as the market cap of Bitcoin currently. Daily trading volume in Bitcoin is currently a bit over $5 billion per day. What if the trading volume in Bitcoin matched that of gold? I think that says all that needs to be said about the coming power of institutional money and Bitcoin.

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