In the second half of 2020, institutional investors began to show increasing interest in bitcoin. More and more investors have announced that they have allocated part of their cash reserves or part of their fund to bitcoin.
The most important one was definitely Michael Saylor with its company MicroStrategy currently owning 70,470 bitcoin. Another important development was that MassMutual Life Insurance Company converted part of its fund into bitcoin. The latter example in particular has given bitcoin much more legitimacy as an institutional investment asset. An insurance company that considers bitcoin safe enough to invest in is a game changer, as this industry is usually known for its very conservative investment strategies.
The inflow of institutional money seems to be becoming a self-reinforcing mechanism. Grayscales Bitcoin Trust alone increased its bitcoin holdings by more than 66 percent from 365,090 on June 9, 2020 to 607,270 bitcoin on December 28, 2020, per bybt.com. In an appearance on CNBC’s “Squawk Box,” Michael Sonnenshein, managing director of Grayscale, said he sees the inflow of six times as much as last year on his platform and that the type of investors has changed. Some of the biggest investors are now investing in Grayscale and these investors are holding bitcoin for the medium to long term.
While a domino effect for institutional investors can be observed, what is the underline for it? Why do these investors see the need to convert some of their capital to bitcoin? Saylor often talks about the need to convert a company’s cash reserves into bitcoin to protect the balance sheet against the declining value in fiat currencies, and in particular the US dollar (USD) which has fallen against other currencies by this year (as later shown in this article).
In a previous article, I found that Google searches in USD are strongly related to bitcoin searches, and I assumed that the impact of the dollar devaluation is felt more directly by people and that it is leading to an increase in bitcoin -purchases.
The dollar has lost value against other major currencies in general. This can be seen in the USD Index (DXY), which includes a basket of the following six exchange rates: EURUSD, USDJPY, GBPUSD, USDCAD, USDSEK and USDCHF.
One reason for this may be the unprecedented monetary expansion by the Federal Reserve. Not only has the Fed expanded its balance sheet this year – central banks such as the European Central Bank (ECB) have done the same, and there are other factors at stake, so it makes sense to look at the DXY. influenced by all these factors. Changes in the world’s monetary landscape are also an important factor, as outlined in the excellent article “The Fraying of the US Global Currency Reserve System” by Lyn Alden. As a result, it makes sense to look at the DXY development in terms of the bitcoin price.
Before we look at the USD index ratio with bitcoin’s price, we must first examine the Fed balance sheet and the bitcoin price. This relationship is shown in Figure 1.
The bitcoin price and the size of the Fed balance sheet seem somewhat related. However, the price does not follow directly on the balance sheet expansion during the first half of the year.
This can also be seen in the correlation coefficients in Table 1. Both variables were correlated with 47.65 percent during the entire period, while in the first half of the year it is only 6.20 percent and in the second half of the year strong increased. to 86.41 percent. A very similar picture emerges for the money supply M1 and M2 this year.
While M1 increased by more than 65 percent, M2 increased by almost 26 percent. The relationship between the monetary variables and the bitcoin price appears to exist, but does not seem as strong as for the DXY.
Throughout the year, the value of the DXY shows a strong negative relationship with the bitcoin price (see Table 1). This is much higher compared to the other two variables. This makes sense when we consider the fact that the US dollar has not only lost value against other currencies due to monetary policy, but also due to other mechanics playing out there. Therefore, the declining value of the USD against other currencies seems to be the more relevant variable.
If we look at Figure 2, the DXY holds the bitcoin price surprisingly well. This appears to be mainly during the second half of the year after the DXY broke below 95 on 22 July 2020. It also appears to coincide with an increase in institutional interest in July and August. Interestingly, the DXY seems to be positively related to the bitcoin price during the first half of the year, where the DXY mainly fluctuated between 95 and 100.
However, if we look at the correlation, it was already negative in the first half of the year (-0.4015). It only got stronger in the second half, with a coefficient of -0.8253. Although the dollar value was not so important in the first half of the year, it seemed that the depreciation pushed investors over the lead and thus increased the relevance for the bitcoin price.
Although the above relationships are only correlations, the relationship still seems strong and as a narrative it seems to be an essential driver of institutional importance. Regardless of what you think about which one of these variables drives institutions effectively in bitcoin, it seems that monetary policy and the dwindling value of fiat currencies are at the forefront.
As a result, the loose monetary conditions are here to stay, and as Alden explains in the article above, the trend of the declining value of the dollar relative to other currencies is likely to continue in the future. With USD’s bearish outlook on other currencies, the devaluation of currencies against hard assets, unprecedented monetary intervention appearing to remain and the domino effect playing out here, more and more institutional investors are expected to enter FOMO in bitcoin in 2021 . it is bullish for bitcoin.
This is a guest post by Jan Wuestenfeld. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.