More people are investing in Bitcoin after an avalanche of coronavirus stimulus shocked the cryptocurrency back to life last year. But as the price of Bitcoin foams higher — sweeping up everything from Elon Musk to the country’s oldest bank to the Oakland A’s — questions have been reignited over whether the digital asset truly has a place in the world of mainstream investing.
Bitcoin evangelists and recent converts, having shaken off the cryptocurrency’s 2018 crash, say this time is different. They see room for ample returns, wider institutional interest, wider access to funds, options and futures. They talk about Bitcoin becoming part of more IRAs, 401(k)s and estate plans.
“We’re going to see a whole new industry emerge, a whole new banking system emerge, around how to deal with this new type of investment,” said Bill Barhydt, a Bitcoin investor and CEO of the cryptocurrency investment app Abra.
Recent weeks have seen major milestones for investing in Bitcoin. News broke in March that Morgan Stanley (MS) would be the first big bank to give wealthy clients access to funds that enable Bitcoin ownership. Rival Goldman Sachs (GS) then made a similar move. Now top cryptocurrency exchange Coinbase expects to go public April 14.
But volatility, insurance and security issues remain roadblocks to bringing traditional investors aboard. So does the possibility of another crash. Bitcoin’s massive energy consumption could be an obstacle in an increasingly ESG universe. And many people still wonder whether investing in Bitcoin is good for anything besides making Bitcoin permabulls richer.
“Bitcoin’s future is thus still uncertain,” Citi GPS analysts said in a report in March. But “developments in the near term are likely to prove decisive as the currency balances at the tipping point of mainstream acceptance or a speculative implosion.”
Investing In Bitcoin Vs. Paying With Bitcoin
The new Bitcoin mania has pushed its price close to $60,000 again. Other cryptocurrencies, like Ethereum, have hit record highs. The enthusiasm has spilled over into other digital assets like non-fungible tokens (NFT), which render things like artwork or music as verifiable pieces of property that can be sold.
Mike Winkelmann, an artist known as Beeple, sold an electronic image in NFT form for $69.3 million. The rock group Kings of Leon released its most recent album via NFT. A New York film director sold recordings of human flatulence in NFT form.
Bitcoin’s original intent can thus be hard to find. That is, a currency that would function like cash yet unfettered from central banks and monetary policy. But Chainalysis found that in 2020, just 0.5% of Bitcoin transactions were made for the purpose of buying something from merchants. That figure is actually smaller than last year, in large part due to the boom in trading.
“Bitcoin is a speculative commodity with no use case,” said David Gerard, an author of two books on cryptocurrency and blockchain. “There is nothing you can do with Bitcoin except sell it on to someone else. It’s like a great big game of hot potato with a price tag.”
He also noted questions surrounding Tether, a type of cryptocurrency pegged to the dollar. Companies that oversee Tether recently settled with New York state after it said “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.” The inquiry, Gerard said, raised questions about how much money is actually in the cryptocurrency system.
Signs Of Institutional Investing
More people investing in Bitcoin, for now, appear to be OK with that. Coinbase estimated verified users to hit 56 million in the first quarter, a 30% jump from Q4.
Coinbase also sees monthly transacting users more than doubling, to 6.1 million, over that time. It also put revenue at around $1.8 billion, more than triple that of Q4.
There were other indications of mainstream acceptance. Financial services giant Fidelity last year saw the number of institutional clients using its digital-asset services grow fourfold, a spokeswoman said.
“Since the end of 2020 into early 2021, from our vantage point, we see a lot more institutional investors that are participating than we have in any other cycle,” Terrence Dempsey, head of product for Fidelity Digital Assets, said in an interview.
Open interest in CME Bitcoin futures, which Citi’s report called “a benchmark for institutional activity,” increased by more than 250% between October and January.
At the end of last year, the number of so-called blockchain addresses — the digital locations where users receive cryptocurrencies — holding more than 1,000 Bitcoins topped 2,000, according to the Citi report. A blockchain is a shared record-keeping system that enables Bitcoin transactions and the creation of new coins.
Phil Bonello, director of research at Grayscale, a digital currency asset manager, said roughly 43% of all Bitcoin were held in those addresses.
“I frequently look at that metric because those are very wealthy wallets,” he said. “Custodians tend to segregate their wallets to reduce risk. When I see that there’s a larger amount of Bitcoin held in those wallets, I think that’s a positive trend.”
The Long Haul
Other data show more people holding crypto for the long haul. At the end of last year, around 10% of users investing in Bitcoin held the cryptocurrency for five years or more, the Citi report said, citing data from Coin Metrics. That’s roughly double the amount during Bitcoin’s previous boom in 2017.
“There are people I know who bought a bunch of cryptocurrency in 2011, 2012, and they’ve never spent any of it,” said Michael Terpin, who runs Transform Group, a blockchain-focused PR firm. “Or they spend a little bit when they need to buy a house.”
Otherwise, he said, “That’s just their retirement money.”
Traditional retirement planning remains a small part of investing in Bitcoin. Fiduciary responsibilities might not apply to IRA providers that offer access to Bitcoin. The cryptocurrency’s volatility isn’t always compatible with a set-and-forget crowd.
Chris Kline, the co-founder of Bitcoin IRA, a platform that allows people to invest IRA holdings into cryptocurrency, said some customers cashed out after Bitcoin’s 2017 run and returned to traditional investments. But Bitcoin IRA’s user count surpassed 100,000 in Q1, a 107% increase from a year ago.
“It was mostly libertarian ‘engi-nerds,’ as I call them,” he said of early sign-ups. Now, “you’re seeing a lot more folks that are looking at Bitcoin for the first time, or have dabbled in it a little bit.”
But to be a truly long-term investment, a number of things will likely have to go right for Bitcoin. In the case of estate planning — or the process of planning out who gets your things after you die — the person transferring the Bitcoin to another person needs to be sure it can get there safely after they pass on.
To access and spend Bitcoin, users need a key, or pass code. Owners can store those keys online. They can also store keys physically, in things like USB drives. Custodians like Fidelity also offer storage services, in rooms with radio-frequency blocking in the walls and multiperson authentication.
Still, Parker Taylor, a partner and chair of the private client services group at the law firm Hughes Hubbard & Reed, said if the wrong person gets their hands on a pass code, the Bitcoin might not go to whom it was intended.
“Whoever gets the pass code has the keys to the kingdom,” he said.
Taylor believes the estate-planning infrastructure around Bitcoin will firm up as more people become interested.
For now, though, inquiries to his firm about Bitcoin and estate planning are infrequent. He notes many people investing in Bitcoin are younger, and perhaps haven’t given much thought to estate planning.
Corporations Join Investing In Bitcoin Rush
Backing from corporate America has also pushed Bitcoin further into the mainstream. PayPal (PYPL) allows users to buy and sell cryptocurrency. Square (SQ) in October said it bought around $50 million in Bitcoin. Its Cash App allows users to buy and sell Bitcoin.
Finance’s old guard is also getting in. The nation’s oldest bank, Bank of New York Mellon (BNY), plans to help with the safekeeping of digital assets. Northern Trust (NTRS) and Standard Chartered’s venture arm teamed up to launch Zodia, a cryptocurrency custodian for institutional investors.
Meanwhile, Tesla (TSLA) disclosed in February it bought $1.5 billion in Bitcoin. And in perhaps the boldest commitment by a company, Microstrategy (MSTR) has amassed more than $2 billion in Bitcoin. The business-analytics software provider said it plans to make Bitcoin “the principal holding in its treasury reserve strategy.”
The company — whose website contains documents and videos about Bitcoin’s potential as well as a “Bitcoin Corporate Playbook” — has argued that investing in Bitcoin had more long-term potential to accumulate value than cash. It also suggests that the flood of pandemic relief could weigh on the value of traditional money.
Bitcoin Investment Risks
Bitcoin’s sharp rise last year, the story goes, came after governments doused their economies in coronavirus relief. The flood of cash diluted the value of traditional currencies. That, coupled with a broader digitization of daily life accelerated by the pandemic, drove investors to Bitcoin.
But as the economy bounces back, and governments dial back stimulus while the dollar drifts higher, then what?
Coinbase warned that trends for the rest of the year are “inherently unpredictable,” with potentially waning interest in active traders if crypto prices fall.
The Citi report said institutional players might slow their investing in Bitcoin and shift back to stocks and bonds.
“Dampening institutional enthusiasm would remove a key source of support to Bitcoin and potentially the broader cryptocurrency ecosystem, thus pushing it back to its more speculative roots,” they said.
Proponents say Bitcoin’s inherently limited supply, designed to top out at 21 million, keeps demand brisk. But with the daily melodrama around the price of Bitcoin, even Microstrategy, in a filing in August, warned of “significant volatility in our reported earnings” if price drops in Bitcoin forced it to take impairment charges.
The filing said cyberattacks were “of particular concern.” Insurance or other safeguards, it added, might not cover any lost Bitcoin.
Insurance Against Bitcoin Losses
Before investing in Bitcoin can become more mainstream, its owners will need the same protections afforded to traditional investments. Without the centralized framework of bank accounts and government-regulated money, Bitcoin and other cryptocurrencies, historically, have been difficult to recover if lost. Chainalysis estimates that as much as 19% of the current supply of Bitcoin is lost.
Transform Group’s Terpin, for instance, alleged in court that hackers led by a 15-year-old stole more than $24 million in cryptocurrency in 2018. He got back some of it via a voluntary partial settlement, he said. But he’s still fighting for the rest.
He is also seeking compensation from AT&T (T) for what he says was insufficient security. The hackers, with the help of an AT&T store employee, purportedly got hold of his phone number to carry out the breach, he claimed. A judge in September dismissed some of those allegations against the telecom giant. But the court has allowed him to request punitive damages as the case proceeds.
The Citi analysts note that some insurance exists for digital assets. But its coverage is limited and expensive, they said. A Bitcoin exchange traded fund could help investors avoid the hassles of buying and storing Bitcoin directly. But the SEC has been reluctant to approve such a fund.
For now, more than a few people investing in Bitcoin are still focusing on gains, not potential losses, as the price of Bitcoin swells.
Terpin lives in San Juan, Puerto Rico, where Bitcoin luminaries have tried to create an entire community that runs on cryptocurrency and blockchain. In an interview in February, he said he moved there, in part, for the easier taxes. Others appear interested in doing the same.
“I’m hosting probably five, six people a week that are well-to-do for the crypto community coming down here,” Terpin said. He later added: “My dance card is full for the rest of the winter.”
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