In the second half of 2020, institutional investors began to become increasingly interested in bitcoin. More and more investors announced that they have allocated part of their cash reserves or part of their fund to bitcoin.
The most prominent was certainly Michael Saylor with its MicroStrategy company holding 70,470 bitcoin so far. Another important development was MassMutual Life Insurance Company converting a portion of its fund into bitcoin. In particular, the latter example gave bitcoin much more legitimacy as an institutional investment asset. An insurer that considers bitcoin safe enough to invest is a game changer, as this industry is generally known for its very conservative investment strategies.
The influx of institutional money seems to have become a self-reinforcing mechanism. Grayscale 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, by bybt.com. In an appearance in CNBC’s “Squawk Box”, Michael Sonnenshein, managing director of the gray scale, said that he sees inflows six times greater than last year on his platform and that the type of investors has changed. Some of the biggest investors are now investing in shades of gray and these investors are holding bitcoin for the medium to long term.
While a domino effect for institutional investors can be seen, what is the push for this? Why do these investors see the need to convert part of their capital into bitcoin? Saylor always talks about the need to convert a company’s cash reserves into bitcoin to protect its balance sheet against the ever-decreasing value in fiat currencies, and particularly the US dollar (USD) that has depreciated against other currencies over the course of the year. this year (as will be shown later in this article).
In a previous article, I found that Google searches in US dollars are strongly related to bitcoin searches and I hypothesized that the impact of the dollar’s devaluation is most directly felt by people and that this leads to an increase in the purchase of bitcoins.
The US dollar has lost value against other major currencies in general. This can be seen in the USD (DXY) index, which includes a basket of the following six exchange rates: EURUSD, USDJPY, GBPUSD, USDCAD, USDSEK and USDCHF.
One reason for this is potentially the Federal Reserve Bank’s unprecedented monetary expansion. However, not only has the Fed expanded its balance sheet this year – central banks like the European Central Bank (ECB) have also done so, and other factors are also at stake, so it makes sense to look at DXY, which is affected by all these factors. Changes in the global monetary landscape are also an essential factor, as described in Lyn Alden’s excellent article “The Fraud of the US Global Currency Reserve System”. Because of this, it makes sense to look at DXY development vis-à-vis the price of bitcoin.
Before examining the relationship of the USD index to the bitcoin price, let’s first examine the Fed’s balance sheet and the bitcoin price. This relationship is shown in Figure 1.
The price of bitcoin and the size of the Fed’s balance sheet seem to be somewhat related. However, the price does not directly follow the expansion of the balance sheet during the first half of the year.
This can also be seen in the correlation coefficients in Table 1. Throughout the period, both variables are correlated at 47.65 percent, while in the first half of the year it is only 6.20 percent and increased strongly in the second half of the year to 86.41 percent. A very similar picture emerges for the money stock M1 and M2 throughout this year.
While M1 increased by more than 65 percent, M2 increased by almost 26 percent. The relationship between monetary variables and the price of bitcoin seems to exist, but it does not seem to be as strong as in DXY.
Throughout the year, the value of DXY shows a strong negative relationship with the price of bitcoin (see Table 1). It is much higher compared to the other two variables. This makes sense if 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 at play. That is why the diminishing value of the dollar in relation to other currencies seems to be the most relevant variable.
Looking at Figure 2, DXY tracks the price of bitcoin surprisingly well. This appears to be true mainly during the second half of the year, after DXY broke below 95 on July 22, 2020. This also appears to coincide with an increase in institutional interest in July and August. Interestingly, DXY seems to be positively related to the price of bitcoin during the first half of the year, where DXY has oscillated predominantly between 95 and 100.
Looking at the correlation, however, it was already negative in the first half of the year (-0.4015). This only got stronger in the second half, with a coefficient of -0.8253. Although the value of the dollar was not so important in the first half of the year, the fall in value seemed to have pushed investors to the limit and thereby increased their relevance to the price of bitcoin.
Although the above relationships are only correlations, the relationship nevertheless appears to be strong and, as a narrative, appears to be an essential driver of institutional interest. Regardless of what you think about which of these variables is actually pushing institutions towards bitcoin, monetary policy and the ever-decreasing value of fiat currencies seem to be at the forefront of that.
It appears that loose monetary conditions are here to stay and, as Alden explains in the article cited, the downward trend in the value of the dollar against other currencies is likely to continue in the future. With the outlook for the USD to drop in relation to other currencies, the devaluation of currencies in relation to tangible assets, the unprecedented monetary intervention that seems to have come to stay and the domino effect at stake, it is expected that more and more institutional investors do FOMO in bitcoin in 2021. In short, this is optimistic for bitcoin.
This is a guest post by Jan Wuestenfeld. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.