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Bitcoin’s Sixth Year Likely Driven By Institutional Participation

Bitcoin’s Sixth Year Likely Driven By Institutional Participation

Happy Genesis Block Day to all of our readers. Today marks the five-year anniversary of the first bitcoin block ever mined, ushering in not only a new digital currency, but also the functional implementation of a potentially revolutionary value transfer technology. Over the past year, market participants have witnessed tremendous growth cycles driven by regional catalysts around the globe – from the Cypriot financial crisis in March to the Chinese exuberance over the last quarter. With increasing interest coming from institutional finance of late, it appears the most significant wave in bitcoin’s sixth year may be oriented not geographically, but demographically.

Visible, Growing Interest

At a combined USD-equivalent value of approximately $10B, the total value of bitcoin outstanding is now the size of a large-cap company and traditional financial firms are showing signs of increasing focus on the budding market. In the last few months, major sell-side banks like CitiNAB, and BaML have published formal research on the industry. While most of it has been relatively rudimentary for those already knowledgeable in the space, they were undoubtedly addressing an initial but growing interest from their client base. Meanwhile, Wedbush has published a number of sophisticated reports applicable even to readers with a solid understanding of digital currency fundamentals.

This institutional interest has also been reflected in media coverage of late. CNBC now has adedicated section for bitcoin that contains their near-daily coverage over the last quarter, with even the Wall Street Journal publishing on the topic at a similar pace. Much of the major news coverage has been about data points that lend to the same hypothesis of institutional interest, including Fortune recently covering speculation that Fortress Investment Group may be involved in the space, or CNN Money noting that a Goldman Sachs board member recently joined the board of bitcoin company Circle as well.

Implications of Institutional Demand

Growing interest from traditional financial firms will likely have a profoundly different impact than the technology enthusiast or day-trading speculators who have been largely responsible for bitcoin’s growth to this point.

Exposure, Not Assets

While they may be interested in the revolutionary benefits of the technology, the likelihood of a professional trader committing the necessary time to navigate the intricacies of safe bitcoin storage is low compared with the likelihood of a general enthusiast managing the same. Most of our readers would consider bitcoin easier than a few tons of oil or corn to hold, but the infrastructure to manage the technical and legal liabilities of the asset to meet institutional standards is something that will take time for most firms to get in place.

Unlike the personal financial management of bitcoin traders, trade settlement at financial firms is generally handled by back office staff executing decades-old procedures, and bitcoin storage would require not only the directive of the trading desk, but also the coordination of new procedures for the back office and IT staff. That many moving parts can dramatically increase risk of mismanagement and extend the time required to build the proper infrastructure.

What this means is that in the near- and intermediate-term, institutional participation will likely be bolstered (and potentially driven) by assets that offer financial exposure while minimizing tech risk. Instruments like the Bitcoin Investment Trust (BIT) offer exactly that, enabling accredited investors to hold BIT shares with weekly liquidity, while SecondMarket manages the underlying asset. Not surprisingly, the NAV of the BIT has climbed to $55M+ from $2M since the inception of the fund in late September – a result of both bitcoin’s price climb and the unique opportunity offered by a firm globally respected for facilitating liquidity in otherwise illiquid markets.


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This entry was posted on January 3, 2014 by and tagged .

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