There are many theories that try to make sense of Bitcoin’s bonanza. But from what I’ve seen in the media, and on Twitter, the most common explanation comes down to this:
Money printing is off the charts,
which will cause inflation and depreciate fiat currencies.
Meanwhile gold is losing its status as a store of value because Millennials and Gen Z don’t get it,
so Wall Street is piling into Bitcoin as an alternative to gold and driving its price to the moon.
Sounds logical but it’s not entirely true.
I’ve spoken with JP Morgan and one of the world’s leading crypto analytics firms, Chainalysis. And turns out, Wall Street is not investing in Bitcoin as a store of value. In fact, “real money”— as JP Morgan calls it—hasn’t bought a single Bitcoin yet.
(To clarify, this story does not seek to trash Bitcoin in any way. It’s meant to clear up Wall Street’s involvement in Bitcoin and help you make better investment decisions for yourself. At the end, you’ll find some investment strategies to build a position in Bitcoin.)
But first, let’s talk about how institutional investors buy Bitcoin and how we can track it.
Yes, data shows big investors are involved
Unlike you and me, institutional investors can’t pop Robinhood on the phone and put in an order for 1000 Bitcoins. They’re often limited for liquidity, regulatory, and other reasons. So, according to JP Morgan, most asset managers still prefer Bitcoin in the fund format.
That means a good gauge of Wall Street’s involvement in Bitcoin is Grayscale’s Bitcoin Trust (BGTC). As I wrote in Meanwhile in Markets, it’s the one and only Bitcoin fund out there—and the single option for asset managers to buy Bitcoin as a fund.
Has it drawn more attention from investors lately? You bet it has. According to JP Morgan data, the investments in Grayscale’s Bitcoin fund exploded a record 18X from $500 million to $6 billion last year.
Now, there are no laws barring asset managers from buying Bitcoin directly. “Regulation itself is not limiting institutional investors. A perceived lack of regulatory clarity is,” Jesse Spiro, Chief Government Affairs Officer at Chainalysis told me.
So institutional investors can buy and hold the cryptocurrency itself and some apparently do. Problem is, that’s not easy to track.
You see, their orders are usually too big for exchanges. So they often use “match-making brokers” (in financial lingo: over-the-counter brokers). Instead of placing an order on a centralized exchange, they match buyers and sellers one-on-one and make the transaction in private.
And there are many ways to hide bigger orders by breaking them into thousands of small ones.
For these reasons, Philip Gradwell, Chainalysis’s chief economist, thinks the best way to track down institutional buying is to look at so-called “whale wallets.” These are Bitcoin accounts holding at least 1,000 Bitcoins (as I write this, worth +$40M).
“There’s no easy way to track down institutional buying. But a good proxy is Bitcoin held by “whale wallets”—some of which are institutional investors or OTC brokers [match-making brokers] buying Bitcoin on their behalf,” Gradwell said.
Here’s a chart that shows the growing appetite for Bitcoin from “whale wallets”:
In the last week of December, “whale wallets” bought 731,000 Bitcoins (worth ~$18 billion) from exchanges. For some perspective, that’s a third of all Bitcoins bought on exchanges during that time.
It looks as if big investors are indeed playing a role in Bitcoin’s rally. But there’s a big, fat catch.
Most institutional buying is speculative
Just because bigger investors are involved in Bitcoin this time around, it doesn’t mean they are investing in Bitcoin (not trading). Nor does it mean that Wall Street is piling into Bitcoin as an alternative to gold.
Quite the opposite. It seems that most institutional buying comes from speculative traders and high-risk funds.
“We believe that a significant component of last year’s institutional flows into bitcoin reflect speculative investors seeking to front run other more real-money institutional investors,” JP Morgan analysts said.
And there are two telltale signs of that.
For starters, take a look at the funds that hold the largest stakes in Grayscale’s Bitcoin Trust. Most of them are disruptive technology and otherwise speculative funds, as you can see below:
And compare that to the top funds holding the world’s largest gold ETF (GLD) GLD :
Another sign is the explosion of Bitcoin’s futures contracts. (Futures are contracts that give you a right to buy a stock, currency, or commodity at an agreed price in the future. Traders often use them to make money or otherwise benefit from price swings.)
“The frothy positioning in Bitcoin futures is one manifestation of this speculative institutional flow. Indeed, Bitcoin futures, the preferred vehicle of speculative investors, saw a sharp increase in open interest in recent weeks,” JP Morgan wrote in a report.
In fact, the number of available contracts for Bitcoin’s futures (open interest) has blown up 17X since the start of 2019—and 4X just from this past November—as you can see here:
The big guys on the block are still on the sidelines
Now, despite bold calls in the media, none of the world’s ten largest asset managers bought Bitcoin directly or through Grayscale’s trust. Neither Blackrock nor Fidelity, Vanguard, Goldman Sachs GS or the rest of the list that manages $32 trillion. Not one.
And most of Wall Street’s top hedge fund managers still swear off Bitcoin.
Take Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates. In a recent interview for CNBC, he said: “It’s a shame. It could be a currency. It could work conceptually, but the amount of speculation that is going on and the lack of transactions [hurts it]”
Peter Boockvar, chief investment officer for Bleakley Advisory managing $5 billion, calls the idea that Bitcoin is replacing gold “absolute nonsense.” In a Monday note to clients he said: “Something with a 10+ yr history is not replacing something with a 5,000 year track record.”
While there are opposite—and very, very optimistic—predictions for Bitcoin (such as JP Morgan’s $146,000 target), neither of the asset managers making those calls disclosed any investments in Bitcoin so far.
Which leaves us hanging with more questions than answers.
Should you invest in Bitcoin as an asset class?
Is Wall Street’s idleness a sign of a bubble or a temporary regulatory/volatility barrier? Does Bitcoin deserve a place as an asset class in your long-term portfolio? And should you try to front run “real money”? If so, how much is it smart to bet at this point?
Unfortunately, there’s no playbook here. You can’t dust off an economics textbook and look up what worked best in the past. Bitcoin and other cryptos don’t yet have a history as an asset class. But gold does, and you could look at this this way.
A rule of thumb is to hold 5-10% of your assets in gold as “insurance” against the depreciation of paper money. If you believe in Bitcoin as an alternative to gold, you can move part of your supposed gold allocation to Bitcoin. The higher your “faith” in Bitcoin, the more you invest in Bitcoin vs. gold.
As a starting point, you could also piggyback on allocation targets of other smart investors.
For example, billionaire hedge fund manager Paul Tudor Jones is one of the biggest Bitcoin advocates on Wall Street. Last May, he revealed that he had put 1-2% of his assets in Bitcoin. He calls it a “great speculation” that could become a new asset class.
Then keep in mind that timing is everything at this point. Bitcoin is on a hell of a roller coaster right now. And it looks like speculation is still one of the driving forces of this ride.
That means that just as quickly as billions of dollars piled into Bitcoin, they could flee from it equally fast. In fact, JP Morgan’s gauges of “mean reversion” (translation: return to historical averages) in Bitcoin are at all-time highs.
That’s why you might consider “dollar-cost averaging”. Let’s say you have $100K in assets and you want to invest 1% of it in Bitcoin. Instead of plowing $1,000 in all at once, you could invest $100 every month until you’ve hit your target.
And maybe that’s a great starting point.
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