Wall Street is Coming for Crypto – The Good, the Bad, and the Ugly
Over the past few months we have witnessed a rapid growth in the popularity of Bitcoin among institutional investors. Public companies like Microstrategy, Square, and many more, have now converted (part of) their cash reserves into Bitcoin.
At the same time, institutional crypto custodians are starting to appear literally everywhere. With the significant amounts that institutional investors wish to allocate towards BTC, it is important to have security backlogs.
Among these companies is Grayscale, which saw its assets under management skyrocket in value, as Wall Street chose them to be their middleman of Bitcoin exposure.
The investment first started its crypto trust last year with $2 billion in assets, and currently holds more than 3% of BTC’s supply. The rapid increase in demand came primarily from institutional investors, including large hedge funds, pension funds, and more. At the moment, the company claims that institutions make up 87% of their investors.
It is clear that Wall Street is coming for crypto. But is this good news for investors? What are the long term implications of power players getting exposure? Will the money-hungry elite praise bitcoin for its technological potential or use it as a vehicle to “milk out” as much profit as possible?
The Wall Street Bitcoin combo is undeniable
Wall Street investors have finally discovered the great opportunity that bitcoin presents as a store of value. The features of the popular cryptocurrency make it a perfect hedge against inflation, and we can all expect more of the latest to occur in the next few years.
Among those who chose to embrace BTC is also Paul Tudor Jones, a well-known persona in Wall Street investing circles. According to reports, he is currently holding between 1%-2% of his portfolio in BTC, as a hedge against economic risks.
Try to imagine the amount of expertise and financial analyst “filters” such top-level investors would need to go through before deciding to make their investment. Make no mistake, the Wall Street Bitcoin phase has started since last year, and you are only seeing the early stages of it.
Why do we see Bitcoin becoming a Wall Street favorite?
Paul Tudor Jones, same with other large-scale institutional investors are well aware of the economic instabilities that we are facing on a global scale. Bitcoin may have seemed like a risky asset back in its prior bull cycle, but today, it is seem as more of a “life raft” they can hold onto, while the US dollar continues to melt like an ice cube. This makes Bitcoin:
A great hedge against inflation
With a projected inflation rate of 12-15% per year for the next 3 years at least, many economists believe that we will experience a massive devaluation of the US dollar. This leads many institutional investors to see out assets that do not lose their value due to inflation, and the only three options to do so are precious metals, collectibles, and Bitcoin. The easiest bet of the three is, of course, BTC.
Reliable store of value
Bitcoin is decentralized, can be transferred and stored easily, while there are no recurring costs that come with owning it. Aside from that, it is built by design to increase in value, as it has a limited supply of 21.000.000 coins and an increase in mining difficulty each 4 years.
A reason to FOMO
When large public companies decide to invest 85% of their cash reserves into Bitcoin (a.k.a. Microstrategy), a steer of emotions is caused among other institutions. This inevitably sends them down the rebbit hole and leads them to participate into the revolution, by developing a Bitcoin strategy.
Earlier in 2020, many investors were taken aback with fear when they saw Bitcoin follow the stock market downtrend on the announcement of the COVID19 pandemic. Since then, however, BTC has completely decoupled from all other investment markets to make an impressive recovery that ended up exceeding its prior ATH.
All in all, there is a lot of money to be many by surfing the volatile waves of cryptocurrencies. While Bitcoin is not a mainstream investment option as of yet, large players continue to explore its potential while they continue planning exposure strategies.
Keep in mind, however, that the benefits of getting into Bitcoin do not necessarily lead to an increasingly positive climate for the growth of the crypto industry. Macro (whale) players have the potential to lead the industry to an uncertain future.
Bitcoin enters Wall Street but macro players want full control
While most Bitcoin maximalists have become vocal with regards to the positive effects of Wall Street entering the market, others have a more gloomy outlook. Institutional investors, they believe, do not care about a permissionless, decentralized payment system; they care about making money for themselves and their clients.
At this point, it’s noteworthy to mention a thoughtpiece of Mark Helfman, who goes into the specifics of the “ugly” long-term outcome. While we tend to be optimistic with regards to the future of crypto, all viewpoints should be discussed.
Mark proposes a very different approach from institutions that perfectly ties in with the eventual “supercycle” by Dan Held.
1/ Why Bitcoin may be going through a “Supercycle”
This time is different: COVID, Gold 2.0 narrative, institutional herd, and ease of use have set a new stage.
Instead of a normal bull/bear cycle, Bitcoin would break convention and enter a “Supercycle”
— Dan Held (@danheld) December 26, 2020
At the moment we see many institutions betting everything on Bitcoin despite the large volatility in prices. We see companies like Grayscale buying more coins by the day. We also see large payment systems (Paypal, CashApp) hoarding Bitcoin to provide exposure to their clients.
What’s more interesting however, is the development of crypto custody services, which partially ties in with the above. These are made by large institutions who are helping investors get exposure to the digital asset while maintaining control of the underlying asset. In short, they buy up the Bitcoin, and sell you its “paper” equivalent as an investment opportunity.
Sooner or later the Bitcoin supply that is currently traded on exchanges will cease to be available. Large institutions will buy up all of it. At that point, investors will only be able to acquire it through “authorized partners”, which is another word for “third parties”. Once again, power goes back to the elite, at the cost of the small-time investor.
When this happens, it will not only be impossible to be the sole owner of your private keys (as these custodial services hold your keys too), but you will also have to go through third parties when making transactions.
How could this affect the crypto economy?
If you’ve been around long enough to see the scams and hacking so often experienced in the crypto space you might sigh in a sense of relief. Not only will you be able to insure your coins with a government-backed institution, but you will no longer need to stay awake at nights trying to memorize your wallet’s seed phrase.
On the other hand, those that invest in Bitcoin for its technological innovation will either be dissapointed or scared. After all, the introduction of all these new financial products creates massive risks for cryptocurrency.
Helfman mentions that we could see all small exchanges being bought up by government-backed corporations, to control all custodial wallets. We are already seeing this happen with smaller exchanges who request a whitelisting of your withdrawal address to ensure you are the rightful owner of it.
The same is true for all IEOs, ICOs, airdrops, and all other money making opportunities in the industry.
The fight is not against cryptocurrencies, but against their self-custody and pseudoanonymity. Much like any other payment system, central banks and governments can maintain an overview thanks to the public ledger, but their lack of transactional control makes them fearful of its implications. As such, they aim to completely eliminate self-custody, an effort that could take many years to play out.
What can regular investors do to protect themselves?
Knowing that things might get gloomy is should not act as a sale signal but as a wake up call. There are still many things you can do today to protect yourself from an eventual centralization of the crypto industry.
First off, make sure you store your cryptocurrency in a wallet that provides self custody. There are several mobile wallets that allow you to do this. The best option, however, is hardware wallets. Not only do they provide offline storage for your funds, but they also require manual authorization on your end for each and every transaction.
Once you lock up your funds in a hardware wallet, you will have an option to purchase crypto from within them. Keep in mind that doing so requires KYC, and thus whitelisting. If you decide to do so, your identity will be tied with your wallets. In case you wish to maintain your privacy it is best to use your hardware wallet for storage purposes only.
When it comes to trading, you have many options to choose from. The safest option however, is the one with the steepest learning curve. Decentralized Exchanges (DEX) allow you to trade crypto without creating an account, which is ideal if you wish to maintain your privacy and use your skills to increase your exposure to digital assets.
When it comes to cashing out, KYC is always needed. According to current US and EU regulatory frameworks, it is mandatory for all exchange platforms to know who their customer is. Knowing this, the second important step is not use an exchange that does no require users to deposit crypto into their custodied exchange wallets. Paybis is an excellent option for people who wish to sell in the safest way possible. When creating a sell order, you will be requested to send the funds directly from your private wallet, without having to store it on exchange-based wallets first.
It is becoming increasingly clear that Bitcoin and Wall Street are two terms that can be used in the same sentence. The prior has managed to evolve into the greatest investment opportunity ever known to mankind, while it continues to remain volatile and loosely regulated. This offer great opportunities to institutional investors who see the benefit of the massive inflation rates that we are about to experience.
The good news is that increased exposure in Bitcoin will naturally lead to a growth in demand. And since there is a limited supply of coins, the price will eventually need to increase. This, paired with the fact that Bitcoin is hard, sound money, makes it a no-brainer for those with a long-time preference.
The bad news is that Bitcoin could eventually be bought up by corporations, removing it from the free market. When that happens, users that want to buy will need to go through third parties to get exposure? The price of Bitcoin at that point could be worth millions of dollars, but the decentralized element will be eliminated.
All in all, it is important to recognize that, even in seemingly positive market conditions, you always need to remember that there are risks involved.
The future is still unknown and all we can do for now is embrace the move of Wall Street in the cryptocurrency space. From that point onwards, we will need to see if their hunger for money and power will exceed their belief in a brand new monetary system that gives control back to the people.