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Institutional volume pops as professional investors opt for Bitcoin

Bitcoin is on track to post its second-highest quarterly gain since 2014. With custodial solutions, exchanges, and institutional trading platforms all reporting an uptick in volume, has institutional capital arrived?

The SEC has again pushed out the deadline for its decision on a potential Bitcoin ETF, and Bakkt has delayed the launch of its bitcoin futures product. However, behind the scenes, a new wave of institutional investors is finding their way into the crypto asset market. This is a sign that the industry is maturing and crypto is increasingly recognized as a legitimate new asset class with strong potential for growth.

Coinbase and Grayscale have a head start

During May’s Consensus conference, Coinbase founder Brian Armstrong revealed that Coinbase Custody, the exchange’s institutional custodial service, now has approximately $1 billion in assets under management (AUM). Coinbase Custody launched one year ago. These investments have not come from legacy finance institutions, but instead from token funds and venture capital firms, institutions that are more likely to be comfortable with the risks involved.

“The token funds and the venture funds will make up the first two big buckets of institutional money,” said Armstrong. “Not to say that the Blackrocks and the Goldmans won’t do something in this space, but if you think about a poker analogy, for them to take their entire chips and go all-in, I don’t see that happening in the next year or two.”

Many of these smaller funds are interested in investing but need the help of qualified custodians who can act on their behalf within the crypto ecosystem. Some of the assets supported by Coinbase Custody, such as Tezos (XTZ) allow holders of the token to participate in on-chain governance and voting and stake their tokens to generate passive income. Coinbase Custody offers these services to its clients, undertaking the technical execution of governance, voting, and staking as a core service. Coinbase Custody supports almost 30 different crypto assets, with Bitcoin remaining the most in-demand asset for institutional investors.

Grayscale, the crypto asset investment advisory firm which hit headlines for its recent #DropGold campaign also reported a strong demand for Bitcoin over other crypto assets. Grayscale’s Q1 2019 Digital Asset Investment Report reveals a 42 percent increase in investment, with $42.7 million invested in the first quarter of 2019, up from $30.1 million in the last quarter of 2018. Showing the preference for Bitcoin, 99 percent of this flowed into the Grayscale Bitcoin Trust, compared to 76 percent of total inflow into the Bitcoin Trust in 2018.

As an explanation for the overwhelming preference for Bitcoin, the report states, “Nearly all inflows in Q1 were into the Grayscale Bitcoin Trust (99%). One possible explanation for this is that Bitcoin found a ‘sweet spot’ with respect to relative risk and return expectations versus other digital assets. With early signs showing we may be entering a new risk-on regime, investors may be wise to look for opportunities in other digital assets as well.”

The report points to the 2020 Bitcoin halving event as another factor driving the appeal for Bitcoin. “Investors may be focused on Grayscale Bitcoin Trust’s return-enhancing potential as we approach Bitcoin’s third ‘block-reward halving’, expected to take place in May 2020. Historically, block-reward halvings have helped drive above-average returns for Bitcoin in the years that follow. Some investors may be questioning if this event is fully priced into the market yet, and building long positions as a result.”

Wall Street makes moves

The recent increase in the Bitcoin price and the accompanying volatility has driven the growth of platforms geared towards institutional traders. “Coinbase Pro,” said Armstrong at Consensus, “is now dominated by institutions, which outweigh retail traders on the platform and make up sixty percent of trading volume.”

April and May have also been good for the Chicago Mercantile Exchange’s (CME) Bitcoin Futures market. May is on track to be the strongest month on record for the firm. It saw a record trading day on May 13 with 33,677 contracts traded, the equivalent of approximately 168,000 BTC or $1.3 billion.

CBOE, which recently announced its intended departure from the bitcoin market, saw a slightly less significant boost in volume, with a spike of 19,000 bitcoin futures traded on the busiest day in May, compared to 15,500 traded on the busiest day in January.

To date, it has been the smaller more nimble players and funds that have been prepared to jump headlong into the market. The large global institutions that comprise the bulk of asset management are for the most, yet to dip their toes. As the new offerings from Bakkt and Fidelity launch and mature, this is expected to change. Anthony Pompliano tweeted that Facebook, Nasdaq, NYSE, Yale, Harvard, Fairfax County Pension, Founders Fund, Union Square, Amazon, JPMorgan, Starbucks, a16z and IBM are all currently building, investing and experimenting with crypto. Would you bet against them?


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