Considered as a very important factor for mass adoption, institutional investment is capable of expanding the crypto space and developing the crypto market. As per managing partner and head of research at Fundstrat Global Advisor, Tom Lee, a renowned personality in the space, bitcoin couldn’t capitalize on institutional investment due to several reasons.
Lee explained that as bitcoin wasn’t centralized, companies aren’t able to grasp the true essence of bitcoin. He added that due to lack of bitcoin spokesperson and company, institutions couldn’t comprehend bitcoin completely and find its usefulness.
And I think crypto is really more like a hive mind community. There really isn’t a centralized Mr. bitcoin spokesperson and there’s no bitcoin company yet….. So it’s a very different business and I think because of that it actually makes traditional institutions really leery of trying to enter the market because it’s hard for them to believe that they can come in with an edge.
Bitcoin, the world’s first truly decentralized cryptocurrency, is not governed by a CEO or any other body. Allowing peer to peer payments, bitcoin is not influenced or controlled by a third party either. Unlike fiat currencies that are supervised by banks and bodies, bitcoin created by Satoshi Nakamoto doesn’t belong to any country or organization.
However, like other markets where decisions of managers control macro factors affecting the performance of stocks, bitcoin’s performance is also dependent on macro factors. Though not similar to the factors acting in traditional markets, bitcoin mining and adoption are detrimental to the price of bitcoin. Lee’s exact words were:
Some simple things, one, I think you can show really conclusively that bitcoin is a network value asset so measurements of adoption have explained price movements. The second is because there is a proof of work to bitcoin that mining has actually proven to be a pretty important sort of way to set parameters around what is fair value for bitcoin.
Bitcoin is created during the process of mining. When a new block is added to the bitcoin blockchain, new coins are minted. As the newly created bitcoins are awarded to miners, it is up to them to sell or hold the bitcoin, which ultimately controls the dynamics of supply and demand. As bitcoin price is only dependent on the fundamentals of supply and demand, miners holding or liquidating their rewards gets to roughly define the range of bitcoin price. Hence, mining was considered as one of the two macro factors outlined by Lee.
Besides, Lee described the size of the crypto market as another factor hindering the participation from institutions. According to him, the traditional market crypto space was soo small that it was almost insignificant when compared with other markets.
At the moment, while the crypto market cap is roughly $200 billion, the market cap of gold is $99 trillion. Even the stock market and bond market caps, 66 trillion and 86 trillion, are enormously significant. This explains why big institutions aren’t serious toward bitcoin and other cryptocurrencies. In this regard, Lee said:
It’s probably correct I think about 1% of the U.S. owns bitcoin and at that size it’s too small for an institution, it’s a hobby.
Lee also emphasized undeveloped infrastructure and regularity framework preventing investors from entering the crypto space. He explained that although bitcoin was recognized and legalized by many countries, sufficient regulatory protection for bitcoin wasn’t offered. He stated:
There’s not enough legal and regulatory protection for bitcoin in the U.S. to prevent a White House executive order banning bitcoin, like nothing today would prevent bitcoin from being outlawed in the U.S.
Bitcoin belongs to a volatile crypto class. The decentralized asset is very unpredictable as its price surges to an all-time high at one moment and drops down to the ground on another. Therefore, apart from general awareness, regulatory protection is much needed to facilitate crypto investors.
Although bitcoin’s market isn’t comparable with gold and stocks, the growth rate of bitcoin has been phenomenal. Let’s see if the crypto asset can stand upright against the already established traditional market stocks while attracting institutional investors.