Bitcoin
Prediction: Bitcoin will reach US$1 million because of this little-known phenomenon
Action will generate more action.
Day by day, Bitcoinin (Bitcoin 0.56%) unique characteristics, which make it different from any other asset in the world, are increasingly recognized and understood by investors. The recent approval of spot Bitcoin exchange-traded funds (ETFs) will further this understanding, as these ETFs simplify the process for investors to gain exposure to Bitcoin.
Although the approval of spot Bitcoin ETFs has been widely celebrated as an unofficial seal of legitimacy, signaling that Bitcoin is here to stay, there is another crucial dimension to consider. Once this is fully understood, it will become evident that Bitcoin has the potential to reach the coveted price of $1 million.
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Understanding the current scenario
The approval of spot Bitcoin ETFs revolutionizes how the average investor, or retail investor, can add Bitcoin exposure to their portfolios. Simply purchasing shares of one of these ETFs through their brokerageinvestors can now bypass the complexities of navigating cryptocurrency exchanges and managing digital wallets.
This development has the potential to significantly increase demand for the limited and decreasing supply of Bitcoin. However, as transformative as this increase in access for retail investors is, it will pale in comparison to the tidal wave of demand predicted from institutional investors entering the market.
Before diving into the numbers, it is essential to understand who institutional investors are. For a long time, I heard Bitcoin enthusiasts claim that institutions were coming, but I never fully understood what that meant. Institutional investors are organizations that invest money on behalf of their clients. These include pension funds, retirement plans, sovereign wealth funds and hedge funds, among others. Essentially, they manage and invest large sums of money.
Prior to the approval of spot Bitcoin ETFs, institutions were prohibited from entering or hesitant to enter the Bitcoin market due to the complexities associated with owning digital assets. However, with the advent of these ETFs, institutions can now easily incorporate Bitcoin into their extensive portfolios, opening the door to a significant influx of institutional capital into the Bitcoin market.
It’s time to crunch some numbers
But what will be the impact of these institutions? On May 15, it was estimated that around 700 professional investment firms held around $5 billion in these Bitcoin ETFs in cash. Leading the way is Millennium Management, an investment firm that manages more than $64 billion, with $1.8 billion tied up in Bitcoin ETFs, about 3% of its total portfolio. But the list goes on and includes names like Morgan Stanley (the sixth largest bank in the US), Bracebridge Capital (a hedge fund that manages investments for Yale and Princeton) and even the Wisconsin State Investment Board.
However, as it currently stands, retail investors are the primary owners of spot Bitcoin ETFs. Reports suggest that around 10% of all assets linked to ETFs come from institutions. But this number is growing and will continue to grow.
The influx of institutions into the Bitcoin market will likely be gradual, as they typically engage in extensive due diligence before making allocations. Unlike retail investors, who can quickly enter the market by purchasing shares of an ETF, institutions often take time to research Bitcoin’s impact on their portfolios before making small allocations.
However, after doing their research, I think everyone will probably come to the same conclusion: Bitcoin’s inherent characteristics make it a necessity in wallets. Eventually, widespread adoption among institutional investors will occur, leading to a tsunami of capital flow.
How much money is unknown, but based on recent studies that say a 5% allocation is the ideal amount of exposure, we can begin to estimate the potential impact of institutional investors. With 5% of the vast $129 billion in assets they manage, Bitcoin’s market capitalization could rise to more than $7 billion and its price could exceed $400,000.
However, some analysts argue that a 5% allocation may be too conservative. Most notably, a recent study from ARK Invest suggests that the ideal exposure level should be closer to 19%. If this happens, the price of Bitcoin could rise to more than US$1.3 million.
The little-known theory that comes into play
What we are witnessing marks the beginning of a fascinating phenomenon: game theory. In essence, game theory suggests that rational actors, in this case institutional investors, will act strategically in their best interests based on the actions of others.
As institutions watch their peers reap the benefits of Bitcoin investments, they will inevitably face pressure to join the fray or risk being left behind in the race for returns. This dynamic, driven by the desire to outperform peers and secure maximum returns, will likely fuel a surge in Bitcoin adoption and investment unlike any we have seen before.
While retail investors have played a significant role in Bitcoin’s journey thus far and continue to be an important group, the entry of institutions represents a paradigm shift. The scale and resources at its disposal will not only amplify the dynamics of the Bitcoin market, but also inject a new level of competition and urgency. As institutions vie for supremacy and seek to capitalize on Bitcoin’s potential, the game is expected to evolve in unforeseen ways and take Bitcoin to new heights.