TheWall: Bitcoin rally is different this time round

This article first appeared in Wealth, The Edge Malaysia Weekly, on January 25, 2021 - January 31, 2021.
TheWall: Bitcoin rally is different this time round
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Public-listed companies are upping their stakes in bitcoin, which could provide long-term support to the price of the world’s first and most secure cryptocurrency. Their participation could also reduce market volatility several years down the road, potentially making bitcoin a more attractive asset class that may even be equivalent to gold in terms of importance.

T M Lee, co-founder of CoinGecko, says the participation of public-listed companies and other institutional investors is the key difference between the current bitcoin bull run and the previous one in 2017. 

“Many retail investors have joined the bitcoin market in the past two months as its price rallied, but, surprisingly, the number is not as large as it was three years ago. The participation of institutional investors is really the key difference between the two upcycles,” he says.

Operators of the Digital Asset Exchanges (DAXs), which are cryptocurrency (or digital token) trading platforms licensed by the Securities Commission Malaysia, agree that the participation of institutional investors, which include large corporations, is crucial to the meteoric rise in bitcoin’s price recently. 

While corporate trading accounts for cryptocurrencies are not being registered locally at the moment, DAX operators say local corporations are increasingly expressing their interest in bitcoin, especially after the bull run kicked off last December. 

“There has definitely been an increase in interest in bitcoin from institutional investors based on our conversations with the local corporations. 

“We are still working with the regulators and partners to register corporate trading accounts here, but it is already quite common in some other parts of the world where Luno is operating,” says Aaron Tang, Luno’s Malaysia country manager. 

Hong Qi Yu, founder and CEO of Tokenize Xchange, and Kelvyn Chuah, co-founder and managing director of Sinegy, have also observed a greater interest in bitcoin from local institutional investors, including corporations.

“The interest in opening a corporate account is on the rise, though much slower than that of individual accounts. We have also started to receive more enquiries from institutional investors in the past few months; they want to understand bitcoin better,” says Hong.

“We find it much easier today to convince board members of corporations about the future of digital assets compared with two years ago. However, corporate Malaysia still remains quite conservative,” Chuah adds. 

According to Bitcoin Treasuries, an online portal that tracks the amount of bitcoin held by public-listed companies, private companies and exchange-traded funds, the three companies with the highest amount of bitcoin hold about 0.47% of the crypto-currency’s total supply as at Jan 7 this year. 

The same website shows that the three public-listed companies that hold the most bitcoin are MicroStrategy Inc, Galaxy Digital Holdings Ltd and Square Inc. 

MicroStrategy is a Nasdaq-listed company that provides business intelligence, mobile software and cloud-based services. Galaxy Digital Holdings, listed on the Tokyo Stock Exchange, is a US-based merchant bank dedicated to the digital assets and blockchain technology industry while Square, listed on the New York Stock Exchange, is an American financial services, merchant services aggregator and mobile payment company. These three companies started to purchase bitcoin more aggressively during the second half of last year. 

Bobby Ong, co-founder of CoinGecko, says these companies are replacing their US dollar reserves with bitcoin due to the devaluation of currencies as central banks continue to ease monetary policy amid the Covid-19 pandemic to boost growth. Fiat currencies are also facing the threat of inflation once the global economy gets back on track post-pandemic. 

“Bitcoin, with its finite supply and increasing demand, is seen as a more dependable store of value than fiat currency,” Ong explains.

Bitcoin investors, he adds, expect more institutional investors, especially public-listed technology companies, to replace their cash reserves with bitcoin, which could provide another leg-up for its price. 

“These technology companies are such as the likes of Facebook [which will be launching a digital currency called Diem, previously Libra] and Paypal [which allowed users to trade bitcoin on its platform from last October]. The price of bitcoin could rally further if corporations continue to assert buying pressure on it,” he adds.

Tokenize’s Hong concurs with Ong. “We are expecting to see an exponential surge of institutional investors buying bitcoin in 2021,” he says. 

Drastic change in perception

While there is no way to tell for sure if the price of bitcoin will continue to rally, there is no doubt that institutional and high-net-worth investors are increasingly convinced that bitcoin is a reliable store of value, or an alternative to gold.

Besides technology companies, JPMorgan, one of the world’s largest banks, published a note on Jan 5 predicting that the price of bitcoin could rally to as high as US$146,000 (RM591,600) as it competes with gold as a store of value for investors. Such a view is in stark contrast to its CEO Jamie Dimon’s remark in 2017 that bitcoin was a fraud. 

Renowned investors and billionaires such as Paul Tudor Jones and Stanley Druckenmiller have also put money in bitcoin to hedge against inflation. 

Grayscale Investments, the world’s largest digital currency asset manager that only accepts investment money from accredited investors, has seen its assets under management (AUM) swell by US$1.05 billion in the third quarter of last year, the largest single-quarter inflow in the firm’s history. It also ended 2020 on a high note with US$19 billion of AUM, significantly higher than the US$16.4 billion announced just a few weeks earlier at the start of December. 

According to JPMorgan, bitcoin’s market capitalisation stood at more than US$575 billion (as at Jan 5), which is still 4.6 times lower than gold. Lower price volatility is crucial to draw more institutional investors into bitcoin. 

CoinGecko’s Lee is of the view that bitcoin volatility will gradually fall in the future as institutional investors with a longer investment horizon continue to buy up the digital currency in the market. Local DAX operators also agree, but believe that it will not happen anytime soon. 

“Over its entire lifespan, bitcoin’s price volatility has actually been on a downward trend. However, it still has a relatively small market capitalisation and I don’t think its volatility will fall to the level of other major asset classes soon,” says Luno’s Tang. 

Tokenize’s Hong expects bitcoin volatility to only significantly reduce when its market cap hits US$1.5 trillion and above, with enough depth and breadth in the market. 

Sinegy’s Chuah, however, has a slightly different view. He says bitcoin’s price volatility will fall when more institutional investors start buying up bitcoin. What is holding them back, however, is the lack of comprehensive and coherent regulations. 

“Its volatility will also reduce when bitcoin is used increasingly as a transactional currency or means of payment,” he says.