This article is the content of the New Year’s Eve speech by Carrie, the managing partner of Chain Hill Capital. It is organized and published as follows:

secondary title

image description

Image credit: Chain Hill Capital

The above chart shows the important traditional institutional admission events in 2020. The market has changed dramatically since prominent hedge fund manager Paul Tudor Jones published his key opinion on Bitcoin. Beginning in the second half of the year, the trend of institutional entry became more and more obvious. Institutional investors including enterprises began to invest heavily in Bitcoin, which directly promoted the prosperity of the Bitcoin market in the second half of the year.

Following Paul's judgment that Bitcoin is "the best investment opportunity in the era of great inflation", Larry Fink, CEO of the world's largest asset management company, also threw out his thoughts on Bitcoin:

1) "Is it [Bitcoin] likely to develop into a global market? -- possibly."

2) “Will [Bitcoin] change the demand for the U.S. dollar as a reserve currency?”

The comments are relatively rare for a notoriously conservative institution. While this doesn’t necessarily mean that BlackRock plans to invest in bitcoin anytime soon, it does show that the agency’s leaders have been educating themselves and doing the necessary work.

These remarks also revealed an important message that Bitcoin has finally reached the stage where every financial institution believes that it needs to develop a "Bitcoin strategy." These institutions may choose to do nothing, they may choose to gain some exposure, or they may take more significant steps. Although they will make different choices, at least relevant conversations are taking place within these institutions.

image description

text

image description

Image source: yahoo

image description

Image credit: Pantera Capital

The main drivers of institutional admissions can be broken down into several categories

1. Macro hedging. In the current environment of low interest rates and expanding central bank balance sheets, there is a growing demand for hedging against fiat currency devaluation and inflation. Therefore, Bitcoin has attracted macro investors like Paul Tudor Jones and Dan Tapiero, who are looking for the asset class that will benefit the most in the current environment; Cryptocurrency is a sound currency that can replace legal currency; in addition, the investment attributes of cryptocurrency irrelevance have become more prominent in the uncertain environment brought about by the current epidemic.

2. Value investing. Such investors are optimistic about the digital trend and the long-term value of cryptocurrency technology, and regard cryptocurrency as an asymmetric investment with great potential. They believe that in the long run, cryptocurrencies such as Bitcoin will replace gold and even change the global financial system.

3. Speculative arbitrage. This includes arbitrage and speculation of all kinds. One of the most active arbitrage activities in the market this year is the arbitrage of Grayscale Trust products.

4. Strategic layout. Forward-looking financial institutions such as CI GAM, Pendal Group, Fidelity, S&P Dow Jones Indices, and technology companies such as PayPal and Square, have seen the future needs of customers and the development trend of encrypted assets, and made plans in advance.

We can see a significant increase in institutional engagement from multiple sources.

text

Image credit: The Block

image description

text

text

secondary title

2. Future trends

1. The "gray effect" will continue in the short term

Image credit: The Block

Image credit: The Block

For institutional investors, Grayscale is a very useful arbitrage tool. Based on the current premium, they can achieve an annualized rate of return of up to 60% (Bitcoin standard) through arbitrage. These arbitrage institutions only need to adopt a very simple method-use the bitcoin they hold to purchase private placement shares, and then re-buy the spot to purchase shares during the share unlocking period, and repeat this process continuously.

There are two purposes of re-buying the spot, one is to maintain their original Bitcoin positions, and the other is to increase the premium of GBTC (because the premium usually follows the spot market). The higher the unlock period premium, the more Bitcoin these institutions can buy back. They can then use these bitcoins to start a new round of arbitrage.

By tracking the large-scale inflow of Grayscale Bitcoin trust funds in the past, it can be found that every time a large amount of new shares are unlocked, the price of Bitcoin will increase significantly, and the premium rate of GBTC will also increase significantly. It is difficult to explain these phenomena repeatedly by coincidence, and it is more likely to be the impact of the above-mentioned arbitrage behavior. Therefore, from this perspective, Grayscale is indeed an important driving force for the current market.

text

image description

text

image description

text

The "grayscale effect" is undoubtedly beneficial to the spot market of Bitcoin. While this phenomenon is unsustainable in the long run, it is not going away anytime soon. It is even possible that more similar institutions will emerge, enhancing this "grayscale effect". For example, recently Bitwise's index fund has also begun to be traded on the over-the-counter exchange of US stocks. The structure of this product is very similar to that of Grayscale - an ETF-like product that does not provide redemption. When Bitwise announced its listing on OTCQX on December 9, its AUM was $115 million. As of December 25, its AUM had grown to $292 million. The time period of more than ten days has nearly doubled, which shows that more arbitrage funds have come in. Moreover, its current premium rate is even higher than that of Grayscale. If this high premium can be maintained, Bitwise will enhance the "gray effect".

The "gray effect" may continue until regulatory intervention, for example, mandating the opening of redemption, or the SEC's adoption of Bitcoin ETFs will cause securities such as GBTC to lose competitiveness and demand.

2. The entry of traditional institutions will usher in a period of rapid growth

Traditional institutions did not start to enter the market this year, but before that, they were mainly venture capital institutions, family funds, and some hedge funds.

This year, we have undoubtedly seen the entry of more mainstream institutions, including top hedge funds, large asset management companies, investment banks, insurance companies, and listed companies. Next, we are likely to enter a period of rapid growth in institutional admissions. This is due to several factors.

Demand for macro hedging continues to strengthen

The world's major economies are at the end of a long-term debt cycle. In this period, characterized by high inflation and currency depreciation, inflation-hedging assets will continue to grow significantly in this environment.

Last week, the U.S. Congress passed a new $900 billion rescue bill. This means that the United States is about to inject nearly $1 trillion into the economy, and the new government does not seem to intend to stop injecting liquidity after this rescue package. The mainstream view is that the election of the Democrats means that there will be more than $2 trillion in relief in the future (it may also be $3 trillion).

COVID-19 has certainly added to an already shaky debt cycle. The United States is trapped in an economy dependent on government intervention. It is estimated that millions of people in the United States have been pushed into poverty since this summer, and those people will be pushed into poverty if the relief bill is not passed. Therefore, whether it is through quantitative easing or interest rate manipulation, it will be difficult for the US government not to intervene in the economy in the future. These government measures could alleviate short-term pain, but would further undermine the dollar's status as the global reserve currency.

In July this year, Evertas, an encrypted asset insurance company, commissioned market research company Pureprofile to interview 50 institutional investors and found that 80% of institutional investors believe that the recent quantitative easing policies adopted by central banks and governments in response to COVID-19 may lead to inflation Rates rise, and over the next five years, institutional investors will increasingly invest in Bitcoin as a hedge against this and currency depreciation.

Traditional investment strategies are challenged

Bonds with low or even negative interest rates make the traditional 40/60 portfolio strategy more and more questionable. Over the past three decades, the benchmark U.S. Treasury has offered a fixed, reliable yield, averaging 4%. And now the yield of bonds is falling, the annual interest rate of 10-year U.S. Treasury bonds is only 0.7%, and the scale of global negative-yielding bonds has reached 30 trillion. Real yields on bonds are even lower when inflation is taken into account. These negative-yielding bonds will need to find new alternatives.

image description

text

text

text

text

text

text

text

text

text

text

text

text

text

text

Summary-Traditional asset management institutions manage nearly trillions of assets, and their entry will bring huge incremental funds to cryptocurrencies. As the market cap grows, the crypto market will become more mature and price volatility will gradually decrease. All of this will lay the groundwork for Bitcoin to become a global asset.