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What the MicroStrategy Deal — and Others Like It — Means for the Future of Bitcoin and Altcoin Prices
Commodity.com | Joel | Dec 22, 2020
(Image via Pixabay)
The MicroStrategy Bitcoin gamble has opened the floodgates and now institutional capital is pouring into the crypto ecosystem.
The market for cryptocurrency has long been with individual investors on exchanges like Coinbase and also through brokers — usually online firms. But the landscape of the cryptocurrency market fundamentally shifted in the latter half of 2020.
Following a series of watershed announcements, Bitcoin (BTC) has become a major target of investment firms. One of the earliest (and loudest) entrants into the crypto market was MicroStrategy. But it is just the beginning. The crypto market has reached a new stage of maturity and investor capital is about to flood in.
Why Is MicroStrategy Significant?
The MicroStrategy Bitcoin strategy is significant because the company isn’t technically an investment fund. Traditionally, the company has focused on analytics and data processing software designed to help businesses make better decisions. The company’s pivot to Bitcoin took the world by surprise but it paid off big time.
See: Hedge funds, not hipsters, may be powering bitcoin’s second big rally
The initial purchase of 38,250 Bitcoins for around $425 million netted the company over $100 million in gains in just two months. This eclipsed the $78 million that the company had generated in 3.5 years of operations and spurred MicroStrategy to think bigger.
The company announced a $650 million bond sale in order to bring its total Bitcoin holdings up to $1 billion. The decision proved controversial. Analysts like Citi have already downgraded MicroStrategy to a sell recommendation, citing the company’s overleveraged BTC position.
Citi’s bearish analysis may prove to be out of step with the wider investment community, however. Following MicroStrategy, the likes of Grayscale have dipped their toes into the crypto world. Additionally, JPMorgan has predicted that demand from institutional investors could inject more than $600 billion into the crypto ecosystem.
Institutional investors are clearly falling in love with BTC but the question is: why now?
The Crypto Market Is Entering a New Phase
In the early days of this latest bull run, many crypto observers, this one included, saw striking similarities to 2017. There was a crop of new, often questionable, projects appearing every day. Interest in BTC was reaching a fever-pitch, and it felt like a bubble was forming.
See: Top US Banking Regulator Reveals Positive Cryptocurrency Regulation Coming in Weeks
Eventually, there was a correction. But thankfully, we pessimists were proven wrong and Bitcoin has stabilized at around the $19,000 mark.
The BTC bubble didn’t burst (screengrab via coinmarketcap.com)
There are a number of reasons for this but they broadly boil down into two categories: mainstream perception and market maturity.
DeFi Helped to Bring Market Maturity
In 2017, the crash was largely caused by the proliferation of (often questionable) initial coin offerings (ICOs) — the majority of which failed. In 2020, the decentralized finance (DeFi) boom, often dismissed as a bubble, had helped inject new life into the crypto market and build a stronger foundation.
The reason for this comes down to the nature of DeFi projects. They are typically designed to mimic real-world financial institutions, like lenders or brokers. This helped to create a decentralized ecosystem within the cryptocurrency world that could be accessed using Ethereum and, thanks to WBTC, Bitcoin.
There have been corrections in the DeFi space (screengrab via DeFi Pulse)
There were corrections in the DeFi space, of course. But the sector has continued to go from strength to strength. Towards mid December there was over $14.8 billion in cryptocurrency “locked” in DeFi projects. Users who lock their crypto into a specific DeFi project, such as the crypto lending platform Maker, are able to obtain interest. This enables them to grow their assets.
See: Interested in a High Interest Bitcoin Saving’s Account? Interview with Ledn CEO, Adam Reeds
The change has helped to bring more stability into the crypto sector. DeFi projects also provide a platform on which a proper decentralized ecosystem can grow, which brings us to our second factor: outsider perception.
Institutional Investors Have Realized Crypto Wasn’t a Fad
A big problem in 2017 was that institutional investors, notably JPMorgan, considered BTC to be akin to “Tulip Bulbs.” This lack of trust in the cryptocurrency sector wasn’t unjustified. ICOs were often poorly thought out or outright frauds. And the media's fever pitch surrounding BTC had all the hallmarks of a bubble. Many would have felt vindicated when BTC crashed in early 2018, and likely thought that was the end of the crypto project.
Yet crypto continued onwards. “Hodlers,” while disillusioned, still believed that BTC would rise again. And they were right. This has forced a radical rethink on the part of institutional investors. Bitcoin in particular has proven remarkably resilient and even typically cautious companies like Massachusetts Mutual Life Insurance Co. are making moves on the market.
This will have something of a network effect. As more mainstream investment companies buy up Bitcoin, it will increase the perceived underlying value of the asset. This will in turn constrict supply, and eventually force these investors to look for alternative projects, such as Litecoin or Ethereum, which will help the crypto market as a whole rise.
What Effect Will Institutional Investment Have on Crypto?
Rising demand from strong hands that are likely to hold for the long term will reduce supply and increase demand. This is particularly acute for Bitcoin, where there is a limited supply of 21 million BTC and there is currently around 18.5 million in circulation. Theoretically miners could vote to increase the cap, but this could reduce Bitcoins intrinsic value, so it would be a risky move.
Read:
Bitcoin price hits record high for 2020 after PayPal finally adds cryptocurrency
Advisors Seek Venture-Investing Gold in Fintech
In any case, this demand will create a supply squeeze which will likely push the price of Bitcoin higher. As investors are priced out of BTC they will likely look for other opportunities. The interesting question is whether this will lead to an inflow of funds to BTC-likes, such as Litecoin, or to more ambitious projects like Ethereum.
Bitcoin and Ethereum are very different projects. Investing in Bitcoin or Litecoin is like investing in gold or silver. Investing in Ethereum is a little like investing in an accelerator incubator. Given that Ethereum’s success is heavily reliant upon other projects, such as DeFi, using the blockchain, its risk profile may still be too high for many institutional investors.
In any case, the flow of institutional funds into the market will increase mainstream acceptance of cryptocurrency. This will help to increase long term prices, and heralds the dawn of a new era for cryptocurrency generally.
Independent analyst Kevin Rooke pointed out in a tweet on Tuesday that “MicroStrategy has earned $78 million in the last 3.5 years from their business operations,” while it earned “$100 million in the last 2 months from their bitcoin purchases.”
The gains are unrealized, however, and Saylor has indicated that MicroStrategy plans to keep its BTC for 100 years.
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