Blogs -Will Bitcoin Make a Good Investment? Part 1: Institutional Adoption

Will Bitcoin Make a Good Investment? Part 1: Institutional Adoption


July 04, 2019

Beth Kindig

Lead Tech Analyst

The largest bitcoin conference in the world took place last month in San Francisco with many early pioneers discussing why bitcoin has made a good investment for them and why bitcoin investments will do well long-term. You can view highlights from the Bitcoin conference here.

Bitcoin buyers fall into two camps (primarily). Those who trade the cryptocurrency and those who “stack Satoshis,” a term for stockpiling on bitcoin as a means of building long-term wealth. Stacking Satoshis may be the most successful tactic due to a few key iterations that bitcoin will go through to ultimately strengthen its price and reputation as a solid investment choice. Many bitcoin experts expect bitcoin to be at the height of its development in 2025.

There are key reasons as to why bitcoin will make a solid long-term asset over the next five years and may reach its peak as a new technology with mass adoption in seven to ten years. This 3-part series explores why strategically entering the bitcoin market at a good entry price will make a solid investment for the future.

Bitcoin Investment Cycle: Institutions

This is part of a larger 3-part bitcoin series. Subscribe for the next two phases of this series.

Bitcoin’s investment cycle is important to understand as the cryptocurrency has the potential for mass adoption as blockchain is built out. Although many are concerned with being too early to bitcoin investments, it may be more important to not be too late in building a small position with an entry that can withstand volatility.

Technologies go through various phases of adoption as the customers become more open to using the technology and forming new habits. The volatility seen in bitcoin is not uncommon for a startup venture; what is uncommon is that bitcoin is an investment, and you can track the inflow and outflow of money, which causes more uncertainty than usual for the general population who does not see the typical challenges that emerging technologies go through prior to reaching mass adoption. In other words, bitcoin’s volatility as it attempts to find product-market fit is not uncommon and will reduce over time.

We currently see similar volatility in autonomous vehicles and 5G supply and demand. Volatility is inherent in nascent technologies. The smartphone crawled before it could walk, with QWERTY Blackberry and Nokia phones leading to the evolution of touch screens and app stores.

Virtually every technology product on the market today has examples of volatility and early apathy towards the believability of its potential for scale. Relative to the disruption bitcoin seeks to bring to ancient-old financial systems, the volatility has been in-line with high risk/ high reward endeavors.

Bitcoin Investments Hinge on Secure Custody

Most people can imagine a world that runs on digital financial transactions as money today is exchanged digitally and cashless. For instance, China’s Ant Financial currently serves 5% of the world with a cashless application called AliPay. The United States has digital financial apps, such as the Apple Wallet, and Venmo is a popular method to exchange money between friends without fees.

One of the biggest hurdles for institutions, however, is not the idea of a world run on digital currencies, but rather the decentralization concept and the need for cryptocurrency storage. Institutional investors need to know the assets are secure, insured, and under the care of a trusted third party, per SEC rules, which requires advisers to keep client funds with a qualified custodian. 

Custody solutions safeguard cryptocurrency, and go beyond private keys or wallets, which are subject to hacks or the misplacement of hard disk storage. The word “custody” refers to a third-party provider of storage and security services for cryptocurrencies. These services are aimed at institutions and hedge funds, and incorporate a combination of storage online for liquidity and storage that is disconnected from the internet. Vault storage is a popular method which keeps the majority of the crypto in offline storage with a minority in online storage. Upcoming modifications to the Glacier Protocol will strengthen high-security offline storage for bitcoin.

This year, many emerging custody solutions have been introduced to the market. In the first five months, six new custodians entered the market while a number of existing crypto custody providers have announced new features. There has been some M&A in the crypto custodian market, as well, and exchanges such as Coinbase, Gemini and itBit have launched custody solutions in an effort to push more institutional investors towards bitcoin and digital assets.  

Bitcoin Futures to Launch for Institutions in July

Jeff Sprecher, the Chairman of Intercontinental Exchange (ICE) and Founder of the New York Stock Exchange (NYSE) and many other exchanges internationally, aims to create a federally-regulated crypto ecosystem. The consortium includes Microsoft, Starbucks and the Boston Consulting Group, who are working together to help leverage ICE’s trading infrastructure and to cater to retail investors, institutional investors, and consumers. This could help baby boomers put their 401K into bitcoin, and pave the way for bitcoin-backed ETFs or mutual funds.

Bakkt plans to launch its physically-settled bitcoin futures products for testing in July, according to the company’s blog post. At the core of Bakkt is the custody of digital assets for institutional clients. The first solution will be physical-delivery bitcoin futures traded on a federally regulated exchange and clearing house.

The trades will happen on ICE Futures US (IFUS) and will be cleared on ICE Clear US (ICUS). Bakkt will provide regulated custody as the company has filed with the New York Department of Financial Services for approval to become a trust company and to serve as a Qualified Custodian for digital assets.

Bakkt bitcoin investment

The partnership with Starbucks is a core component for success as Starbucks’ mobile app has more users than Google Pay or Apple Pay.

Bakkt will use both warm (online) and cold (offline) wallet architecture to secure customer funds. The majority of assets are stored offline in air-gapped cold wallets and are insured with a $100,000,000 policy underwritten by global insurance carriers.

Security: Bakkt will use FIPS 140-2 level 3 or higher hardware security modules (HSM) to manage and secure its warm wallet cryptographic keys. The cryptographic systems will be secured in bank-grade vaults and datacenters that are protected with physical security.

Security is one area where the NYSE has already gained trust from institutions. Therefore, the barrier to entry is lower for Bakkt and institutions are likely to enter crypto futures with Bakkt being built on the same system as the NYSE.

Bitcoin Investments Will Get a Boost from Fidelity

Abigail Johnson, the CEO of Fidelity, has been a “believer” since 2017 when she introduced bitcoin and Ethereum mining in 2017 at a conference in New York.

“I’m a believer. I’m one of the few standing before you today from a large financial services company that has not given up on digital currencies.” – Abigail Johnson, 2017

In May, the company announced plans to launch a cryptocurrency trading service in the “next few weeks.” The Fidelity Digital Assets platform was created in October of 2018 with select hedge funds and family offices testing the platform for cryptocurrency custody and trade execution over the last few months.

Bitcoin-Investments-Fidelity

Fireblocks, a platform for securing digital assets in transit, announced a $16 million Series A funding round from investors including the proprietary investment arm of Fidelity, Eight Roads. The startup helps to safeguard the transmission of digital assets across exchanges by building a cloud-based security platform as the current process of moving digital assets is susceptible to cyber-attacks and human errors.

Fidelity interviewed 450 institutions and found that 22 percent already own cryptocurrency and those that own crypto plan to double their allocation over the next five years. The long-term interest from institutions stems from the asset being seen as an uncorrelated risk during an economic crisis (more on this in Part 2 of this series “global economic uncertainty” – follow me for updates).

Forty-seven percent of institutions believe digital assets are worth investing in, according to the survey released by Fidelity on May 2nd. Fidelity will only serve institutions for now while Robinhood and E*Trade serve retailers.

Dose of Reality with Bitcoin Investments

Bitcoin is on the inflection point of institutional adoption, but it’s important to remember it has been there for almost two years. Several attempts to launch a Bitcoin-based ETF in 2018 and 2019 have fallen through as the SEC either rejected or delayed the proposals due to market manipulation. 

Reports published on the SEC website claim that up to 95% of crypto volume on unregulated exchanges is fake, legitimizing the concerns from the SEC and regulators that bitcoin is subject to market manipulation. The presentation was prepared by Bitwise in March of 2019.

There was a follow up whitepaper in May of 2019 that concluded the fake volumes do not affect price discovery in the real bitcoin spot market. The new white paper reiterates that a great number of advances and tools, such as the launch of regulated bitcoin futures and algorithmic trading, “dramatically improve the efficiency” of BTC markets.

The ten exchanges which showed 100% real volume include: Binance, Bitfinex, bitFlyer, Bitstamp, Bittrex, Coinbase Pro, Gemini, itBit, Kraken and Poloniex. Meanwhile, 73 exchanges were condemned by the presentation as contributing to high percentages of fake volumes.

Conclusion:

What you know of bitcoin today as an investment choice will change rapidly over the next 5-10 years with a few key phases of adoption and iterations that will strengthen its price and prospect as a good investment. Today, bitcoin’s price is based on retail traders and crypto enthusiasts. To not believe bitcoin will saturate other markets would require acute, bearish incredulousness.  

Investors in bitcoin today need a few things to happen for the currency to achieve price stability and to reach its long-term potential as a good investment for buy and hold portfolios. If you want to swim with the stream, then look for a great entry price where you can hold the cryptocurrency long term until these phases are built out (again, this will take 5-7 years – maybe 10 years). I’ll be expanding on this point in the other parts of this series.  

Sign up below for my free newsletter.

Recommended Reading:

Highlights from Bitcoin Conference 2019
Will Facebook Cryptocurrency Have A Long-Term Impact?

Uber Stock Had Disappointing Q1 Earnings: So Why Did the Price Go Up?

Image from Crypto Head

Sign up for Analysis on the Best Tech Stocks

I’m an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook’s Q2 crash, Roku’s meteoric rise, Uber’s IPO flop, Zoom’s IPO success, Google’s revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.

If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here.

More To Explore

Newsletter

Will Bitcoin Make a Good Investment? Part 1: Institutional Adoption

The largest bitcoin conference in the world took place last month in San Francisco with many early pioneers discussing why bitcoin has made a good investment for them a...

July 04, 2019

Highlights from Bitcoin Conference 2019

Last week, the world’s largest bitcoin conference took place in San Francisco. Despite bitcoin holding a $200 billion market cap in Q2 2019, cryptocurrency conferences ...

July 03, 2019

Up-Close on Strategy with Lead Analyst of the I/O Fund

Recently I joined Ed Gotham from CMC markets in the Opto Sessions podcast. I discussed what tech trends will shine in the next five to ten years, how I started I/O Fund, and how we spot the right tech

August 06, 2021

Press Announcement: Official Launch of I/O Fund and Audited Results

This week we’ve got big news to share. First off, my team has released audited performance results that outperformed $ARKK since the Fund was founded on May 9th, 2020 and we are currently beating the

April 15, 2021

Blockchain Technology Interest Waning - OSCON

The O’Reilly Open Source Convention (OSCON) is an annual convention for the discussion of free and open source software. Open source has seen tremendous support over th...

July 25, 2019

MWC 2019: A Dose of Reality on 5G, Those Foldable Phones and Bitcoin Has a Serious Competitor

The GSMA Mobile World Congress (MWC) is the world’s largest exhibition for the mobile industry and combines influential companies from Asia, Europe and North America in...

March 07, 2019

Podcast: This Week in Startups and I/O Fund on Tech Investing

The I/O Fund believes venture capitalists are some of the world’s best tech growth investors so we were thrilled to join Jason Calacanis on This Week in Startups.

September 17, 2021

The Key To Unlocking The Metaverse Is Nvidia’s Omniverse

Last week, I wrote that Nvidia could surpass Apple in five years as the artificial intelligence economy will be nearly four times larger than the mobile economy that drove Apple. To get an understandi

September 08, 2021

Will Dividend Stocks Become the Inflation Trade?

Investors were taken by surprise last week when the US consumer price index rose 5.4% year-over-year in June, the fastest pace seen since August 2008. On a monthly basis, it rose 0.9%. Excluding the v

July 30, 2021

Out of Favor With Investors, Poshmark Has Long Term Potential

Poshmark sits at the intersection of three key trends: non-new, sustainability, and social e-commerce. A consumer-to-consumer online marketplace for pre-owned items, Poshmark is a fashion-oriented pla

March 25, 2021

Sign up for Analysis on
the Best Tech Stocks

The I/O Fund specializes in tech growth stocks and offers in-depth research and real-time trade notifications.

We are on social networks


Copyright © 2010 - 2021
Get Free Weekly Analysis on the Best Tech Stocks