Bitcoin initially drew interest from owners for its underlying technology and social value proposition plus its financial potential. As it has matured, attention has shifted to the business case around Bitcoin, its expanding utilization, and the growing commerce ecosystem around cryptocurrencies.
Institutional Interest in Bitcoin Accelerates:
The intersection of low yields and inflationary expectations has increasingly fostered the institutional investor view that Bitcoin could represent an inflation hedge, a portfolio diversifier, and a safe haven not currently offered by traditional government bonds all at once. Open interest in CMEs Bitcoin futures, a benchmark for institutional activity, surged by over 250% between October 2020 and January 2021.
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Future of Bitcoin:
Perceptions about what makes Bitcoin important continue to evolve and create new opportunities while increasing its perception towards becoming mainstream. A focus on global reach and neutrality could see Bitcoin become an international trade currency. This would take advantage of Bitcoin’s decentralized and borderless design, its lack of foreign exchange exposure, its speed and cost advantage in moving money, the security of its payments, and its traceability.
The entrance of institutional investors has sparked confidence in cryptocurrency but there are still persistent issues that could limit widespread adoption. For institutional investors, these include concerns over capital efficiency, insurance and custody, security, and ESG considerations from Bitcoin mining. Security issues with cryptocurrency do occur, but when compared to traditional payments, it performs better.
The use of Bitcoin as a censorship-resistant store of value is facilitating its expanding use as a currency: PayPal, Visa and Mastercard are now accepting it across their vast merchant networks; brand name companies such as Microstrategy and Tesla are moving parts of their corporate treasuries into Bitcoin; charities like the American Cancer Society are accepting Bitcoin donations; there were nearly 12,000 Bitcoin ATMs deployed by the end of 2020; a new Visa credit card allows users to earn Bitcoin as rewards; and more companies are beginning to accept Bitcoin payments, including one that lets you pay for your next space voyage in Bitcoin.
Bitcoin’s engineered approach to ensuring digital scarcity is also prompting many experienced investors to compare it to digital gold. Source code in the Bitcoin network only allows for the creation of 21 mn Bitcoins, of which 18.6 mn are already in circulation. The complexity of mining Bitcoin becomes increasingly difficult as more supply emerges based on its algorithmically-designed approach that adjusts down the rate of production as more coins enter circulation, which helps to insulate it from inflation. Given today’s macro investing environment, many investors are looking to hold Bitcoin positions as a hedge given fiscal and monetary Covid-19-related policy impacts.