The Institutional Adoption of Bitcoin

January 2021

Bitcoin outperformed all major asset classes in 2020. An investment in Bitcoin returned +305% in 2020 as compared to 42% for the NASDAQ, 19% for Gold and 15% for the S&P 500. This performance is a result of institutional adoption and acceptance of Bitcoin as its own asset class. A deteriorating economic landscape, rising social tensions, and concerns over monetary policy have pushed investors to seek out scarce and censorship-resistant hedges. For this, Bitcoin is perfectly placed and has become a desirable asset for institutional investors. This month we are going to dive into the statistics that demonstrate that institutional adoption has arrived.

The Bitcoin protocol specifies that there will only ever be 21 million bitcoins in existence. This final supply will be reached in the year 2140, once the new issuance of bitcoin comes to an end. Today there are 18.6m bitcoins in existence, although it would be wrong to think that these bitcoins are in “circulation”. 4 million bitcoins have not moved wallets for over 5 years and are likely to be lost, and 40% of all bitcoins have not moved in over 2 years.

The top 10 digital asset exchanges only hold 2m bitcoin. This is arguably the real “float” of bitcoin and this float has been declining. When users want to trade, they tend to leave their funds on an exchange where they can execute orders instantly. When they want to hold their coins, they tend to withdraw them to external cold wallets. In December, the world's 10 largest Bitcoin exchanges saw Bitcoin outflows of over 100,000 BTC. These exchanges started December 2020 with 2,095,593 BTC and ended the month with 1,990,693 BTC, representing a 5% drop in their Bitcoin holdings.

The movement of bitcoins off exchanges has been driven by companies and investment funds purchasing Bitcoin and transferring them into private (most likely cold storage) wallets. These two types of entity are buying huge amounts of BTC with the mindset of holding the bitcoin as a long-term investment. On the company side, the most prolific buyer of bitcoin is MicroStrategy. So far, it has bought 70,470 BTC (USD2.5bn today) to hold on its balance sheet and the company’s CEO, Michael Saylor, is becoming a crypto celebrity by giving dozens of interviews (now viewed by millions of people) about why Bitcoin is such an important asset class. This in itself is a trend; companies are not just buying bitcoin but are also publicly preaching the Bitcoin investment philosophy to their investors and the public.

Other than MicroStrategy, Stone Ridge partners bought 40,000 Bitcoin (USD1.4bn) and filled their most recent 16-page shareholder letter with 11 pages about why they made the investment, and why Bitcoin could become far more valuable than it is today. Square bought 4,709 Bitcoin (USD165m) and subsequently open-sourced documentation to help other companies understand the Bitcoin purchase process. Square also open-sourced all their crypto patents, and now funds a team of Bitcoin developers and designers. Companies are not just buying Bitcoin but are making Bitcoin a part of their identity.

On the fund side, there has been a growing interest in Bitcoin funds that offer investors exposure to the underlying asset. In Asia, our Liberty Bitcoin Fund doubled its AUM in December 2020, while increasing its number of investors by 75%. This was driven by new investments from corporations, family offices and prominent and well-respected investors. In North America, Grayscale's Bitcoin Trust remains the largest Bitcoin fund with an AUM of over USD20bn. Grayscale has more than doubled its Bitcoin holdings during 2020, from 261,192 BTC at the end of 2019 to 607,037 BTC (USD21bn) at the end of 2020. While the Grayscale Bitcoin Trust remains a popular avenue for investors to get exposure to Bitcoin, it generally trades at a premium to its NAV of between 15% – 40% on secondary markets. In contrast, the Liberty Bitcoin Fund has no premium to NAV as invested capital is immediately converted into BTC, thereby enabling LPs to get exposure to bitcoin at the actual cost of bitcoin.

The rampant demand for bitcoin from companies, retail and institutional investors has pushed the price of Bitcoin up to historic highs. On 8th January 2021, the price broke USD42,000 and many analysts are predicting price appreciation to over USD100,000 in 2021. As more institutional investors take a long-term position, their bitcoin is removed from circulation, further reducing the available supply. With 46m millionaires in the world and only 21m bitcoin ever to exist, there simply is not enough bitcoin to go round.

CMCC Global produces a paid monthly Bitcoin Report. This provides a comprehensive summary of important milestones, trends, metrics, and insights to help you understand why Bitcoin has recaptured the interest of institutional investors. If you are interested in receiving this report, please email research@cmcc.vc

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