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'One Small Step For Managers, One Giant Leap For Bitcoin' - On The Edge Of A Paradigm Shift

Apr. 02, 2021 1:30 PM ETGBTC, BTC-USD48 Comments
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  • Bitcoin's recent growth is fueled by both aspects. Its ecosystem has matured, leading to more applications in real life.
  • In anticipation of its wider adoption, financial institutions started delving into the crypto space, resulting in a strong inflow of capital.
  • Unlike its 2017 retail frenzy, bitcoin's recent upsurge is partly driven by financial institutions' interests.

By Jianing Wu and Florian Ginez

Mainstream adoption of technology occurs when a system is robust, and its value is recognized by the public. To quantify these measures, let's talk about utility value and speculative value.

Utility value refers to the benefits that the technology provides, reflected by its demands.

Speculative value is when investors believe the technology is worth a value based on future expectations.

Both factors are essential in advancing a system's expansion-utility value is unsubstantiated if speculative value doesn't grow, and conversely, speculative value is artificial if utility value doesn't follow.

Bitcoin's recent growth is fueled by both aspects. Its ecosystem has matured, leading to more applications in real life. In anticipation of its wider adoption, financial institutions started delving into the crypto space, resulting in a strong inflow of capital.

Unlike its 2017 retail frenzy, bitcoin's recent upsurge is partly driven by financial institutions' interests.

In our first blog post of the series, we introduced corporations' purchases of bitcoin as part of their balance sheet assets. Here, we will discuss the second source of institutional demand-the investment management industry's participation.

A Shift in Narrative and Perception

Financial institutions' views of bitcoin have been evolving.

In the beginning, bitcoin was mainly regarded as electronic cash, and many saw it as a means to facilitate illicit activities. As time passed, analysis by blockchain analytics companies like Chainalysis have helped debunk the idea that bitcoin is mostly used for illicit activities-the estimated amount of laundered money accounts for 2%-5% of global GDP ($800B-$2T), while total illicit value including money laundering related to cryptocurrency accounts for 0.34% ($10B) of its transaction volume.1

The narrative also shifted to acknowledge bitcoin as a financial asset for the potential store of value, largely per virtue of its limited supply, as well as a candidate for

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Comments (48)

jackrandolf profile picture
Read "The Age of Cryptocurrency" for a balanced discussion, and bear in mind that book was written 5 years ago.
BayArea2016 profile picture
Timely and correct. It isn't to late for those who haven't pulled the trigger. Know this ... the lowest price forward for bitcoin 5 years from now is around $600K.
Very impressive. Thanks so much!
This article was interestingly written using the concept of crypto specifically Bitcoin .
By definition Bitcoin represents a safe and secure means for value .

Bitcoin Value is brought from the economic term of Utility and the capitalistic term of Speculative .

Beyond the terminology those aspects of Bitcoin are surging demand in the Market.

Will Bitcoin deepen to the level that Fiat has never really overcome it's inflationary instability ?
PaFromFL profile picture
The nail that sticks up, gets hammered down. As cryptocurrency gets more popular and profitable, entrenched governments will see it as a threat to their power and monopoly on money. I expect that governments will ban cryptocurrency using the pretense of a war against drug lords, human trafficking, tax cheaters, energy waste, etc.. Power to the people sounds nice, but ask Bernie Sanders and Donald Trump how that works out in the long run. Money can be made (literally) until the hammer comes down, but it always pays to keep an eye on the authorities (remember the stock sales by congressmen before the pandemic announcement?).
ngtenor profile picture
@PaFromFL They can't ban it. If they could, they would have done it already. The problem is that the technology is going to generate so much economic activity, and this puts governments in a real bind. I'm not talking about crypto as a store of value (which everyone seems to be fixated about on this website) but as a UTILITY.
Crypto is already being used to eliminate advertising and retail coupon fraud and monitor the rollout of vaccines. Soon, it will eliminate pharmaceutical fraud, enable fair elections, ensure the fair trading of carbon credits... the use-cases are endless. Crypto is even being used to prevent Syrians from being bombed by their own government!
You can read more about what's coming here:
ephud profile picture

You are talking about blockchain, not crypto which is based on blockchain.
ngtenor profile picture
@ephud With Proof of Stake, one can't exist without the other.
Where is the utility of BTC? All I see in this article is speculation based on expected store of value. This or that is buying BTC. What are they going to do with it if they are never going to sell it? How is it going to provide anything to anybody unless he sells it for more at a later stage? That's what I want to know.
@Fero. There is no utility in it other than speculation. How would buying Bitcoin improve my life? Truth is, it wouldn’t unless the price appreciated and I could sell it to buy things that actually could improve my life. It’ll collapse at some point because the store of value doesn’t hold up either, as every new Crypto bastardizes the value of every other Crypto. Precious metals are the only true store of value as they can’t be replicated.
Jamjack profile picture
Total portfolio weighting is about 1% and my cost basis is very low now and appreciated value is still very high in the Grayscale so I don't know what to say to the naysayers....However, history teaches us a lot. There can and will be bubbles, but to say fiat paper government currency is the only reliable medium of exchange and to dismiss these crypto currencies like Bitcoin is not very smart and indeed goes against the lessons of history. I do get a little irritated with those who think we all need to know all the technical information on how it works, the creation and the function including mining aspects in order to make a wise and informed decision on crypto currencies. How many people know advanced monetary theory and federal reserve policy and money supply (sure it helps) in order to make informed investment decisions and depend on the paper dollar to buy and sell goods. Could we might just be looking at an alternative global currency not tied to any one country.
@Jamjack , thanks for confirming what I wrote. It has no use to you except giving you warm feelings from looking at large unrealized capital gains. Just remember unrealized gains are just that, till you make them realized by selling. They can vanish faster than they materialized.
richjoy403 profile picture
Thanks for the well-balanced article.

Compared to the size of the portfolios I manage, their BTC positions are relatively small, as would be expected of any other speculative investment.

Bitcoin is mainstream. Love it or hate it, crypto is here to stay. Once the lightening network is in full swing, we'll be counting satoshis, not fiat.
@petsitter210 , the gold standard failed for a reason. It is being used nowhere. How can anybody expect a pseudo gold standard to be accepted anywhere is beyond me. You hate fiat you can still settle your bills in gold if you find a counterparty that accepts it. Same with BTC. But that feature does not make it money and never will in the future. Because no fiat will be ever tied to BTC. Like they are not tied to gold anymore. A volatile commodity at best.
I have studied btc and can find no reason to buy it. It is at best a confidence game. If you have confidence you buy it. That confidence however is built on a very weak foundation and very fragile.
Kochie OneTime profile picture
@ababich1 you studied Btc and found it’s at best a confidence game? I’d say it’s at best would be it’s an open, global financial network. It’s already solving real world problems, like fees on remittances. It’s openness and interoperability mean anyone can create and compete freely and this creativity and competition are both wildly additive to the value of the network. No private company could afford to hire as many people building it’s network as are currently working on Btc and peripheral layers now and at any given moment. The scarcity of Bitcoin the asset makes it valuable as a store of value. But the exponentially growing network is what can really shape the future. Check out what innovation and adoption curves look like over time. Best to at least keep learning than to write off completely IMO.
It might be similar to the "Information Superhighway"
@Kochie OneTime
All interesting points but still built on confidence not a hard assets. A store of value...hardly. Real estate with which to grow food, manufacturing, things that matter in ones life represent a store of value. Even if it gains confidence, Its use will be challanged by various governments. The fees to trade through the exchanges are costly ...no free lunch.
Matts_Bytes profile picture
No one, including fund managers, should invest in this type of asset without first *Understanding how it actually Works* !

You'll notice such details are conveniently missing from this article

I am a lifelong technologist, I believe there is great potential to crypto technologies, but you won't harvest it by owning an outdated coin that can't be mined anymore and is impractical for transactions (EDIT to clarify, your personal mining is effectively ZERO compared to miners of previous years [exponential difficulty increase] and the current professional ASIC miners).

Do your homework, and seek more nuanced opinions.
ephud profile picture

"you won't harvest it by owning an outdated coin that can't be mined anymore"

Can't be mined anymore? I'm mining it now.
TimBandito profile picture

An "outdated coin" whose adoption is increasing daily...Unless you're referring to the USD "coin", which can't be "mined" due to the fact it was removed from the gold standard in the 70s...How is the USD's currency devaluation favoring anyone?
Matts_Bytes profile picture
@TimBandito I heard tulips were adopted pretty heavily at one point too.

At least those could change hands easily...
Pompano Frog profile picture
Dear Reader..

I have experienced so many of these bubbles over the years that you can't believe a new set of fools will fall for a slight change of name and be given the same old elaborate details which mean nothing. This certainly demonstrates that these ETF aggregators are pure marketing organizations who hire young MBA's to do their simplistic analysis to some topic to make it appear that there is some thinking behind all of this investment structure. I assure you there is not.

"Institutions," and I use the word loosely are buying bitcoin for accounts because their clients are asking for about it. These "institutional investors" will buy anything their clients want. They are marketing machines.

Musk didn't buy Bitcoin because of his belief in it. It is because he is smart enough to realize the unknowledgeable who buy Bitcoin also are the same buyers who participate in all of his other equity raises.

The existence of Bitcoin allows for free capital flows around the world. It makes tax avoidance for the wealthy easier. It makes drug money easier to move. It makes it easier to move money out of poor countries.

China has an economic plan. It is not an accident that China has had enormous per capita income growth over the last 30 years. The center of that economic plan is to maintain a dramatically undervalued currency for as long as possible. This is what made Japan. China has designed a tax system to encourage a huge savings rate. That savings rate is funneled through large Chinese financial institutions which carry out their lending activities under the guidance of China's Ministry of Finance.

The first order of business for that lending direction is to offset the positive trade flows with overseas capital flows and/or lending. This is done to maintain a low appreciation rate for the Yuan. China cannot afford capital flows that cannot be controlled. At some point China will use the full force of the State to do something about this. You don't want to be on the other side of this.

This market is unstable to begin with. It will only take one global institutional investor to realize they have to much committed to U.S. equities to start this thing moving in the other direction. Since most investors are using a mental or real momentum model it could unravel very quickly.

S&P 4019, Nasdaq 13480, GBTC 50.87, ARKK 120.85, SPAK 26.92, IPO 63.46
NoahKaufmanMD profile picture
@Pompano Frog My god you’re out of touch.
TimBandito profile picture
@Pompano Frog
"Musk didn't buy Bitcoin because of his belief in it. It is because he is smart enough to realize the unknowledgeable who buy Bitcoin also are the same buyers who participate in all of his other equity raises."

Did Musk tell you this?
@Pompano Frog

I wouldn't talk for the richest man on the planet if I were you. I woukd think that none of know what he is thinking.

Crypto is here to stay and defi most definitely. Those that broke the system cannot fix it. And they might damage the value of btc by heavy regulation but they will never destroy it. It is transnational.

The only thing that could would be a 51% attack or quantum computing, for which workarounds will be found in due course out of necessity..

The world is changing...
Kagami427 profile picture
Certainly. Many long awaited key governmental and banking decisions have been made just in the past few days. I'm sure many have heard of or seen the Citibank projection for over $300,000 (318K?) by the end of '21. I don't know that it will go quite that fast but I do think another double by the end of the year is possible for sure. We've seen a lot of positive things or catalysts for price appreciation happen all at once.

Federal banks can now hold Bitcoin and other crypto assets/tokens (I believe its both, but tax can get complicated...) on behalf of the bank's customers legally as of just a few days ago now. There is sufficient demand from investors to get involved so the banks have listened to the customers demands or requests as Government has since given the okay ( the okay to collect taxes :-] ) to do so and its certainly a decision that's evolved over time through various important avenues. Of late, it hasn't been hard to see the real positive impact that blockchain technology and the cryptocurrencies or tokens that represent that technology (in many cases,) have on the world. The new technology certainly has the potential to make just about everything (almost,) better in any and/or every way you or your employed engineer can personally think up. Applications are endless. We are already starting to see the asset class have real impact on the world even in these very early days, IMO.

Agreed! Nice article!
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