As of this day, bitcoin has surged to al all-time-high price of $20,000. In INR terms, it is trading at Rs 15.25 lakhs per coin.
Here’s what I wrote in my Mint column on bitcoin, back in 2017: “One of the cardinal reasons why bitcoins, or for that matter any other cryptocurrencies, are not trusted enough for actual transactions is their lack of legal tender and the absence of regulations.” I further mentioned, “Like any fiat currency, its success hinges on the trust it may or may not eventually build among its intended users—merchants and consumers.”
Three years after I wrote these lines, bitcoin has surged to a record high price of $20,000 or Rs 15.25 lakh per coin.
At least one major catalyst behind this exponential surge has been the trust placed on cryptos by several foreign institutional investors of late. These investors include American insurance companies, hedge fund managers, and even investment banks.
Consider these 5 recent developments:
(1) In October 2020, the leading fintech company PayPal Holdings Inc announced its new service allowing customers to buy, hold, and sell cryptocurrency directly from their PayPal account. It also indicated its plans to raise bitcoin’s utility by making it available as a funding source for purchases for 2.6 crore merchants worldwide.
(2) Square, a payments firm led by Twitter CEO Jack Dorsey, invested 1 per cent of its assets (or $50 million) in bitcoin this year.
(3) JP Morgan recently began allowing customer transfers to and from two regulated crypto exchanges called Coinbase and Gemini.
(4) JP Morgan’s chief Jamie Dimon also indicated that some influential investors have been investing in bitcoin of late. These include for instance Paul Tudor, an American hedge fund manager.
(5) But more importantly, one of America’s top insurance behemoths, Massachusetts Mutual Life Insurance Company, bought $100 million in bitcoin.
All this is to say that bitcoin’s rise is led by two main factors.
One, the flow of “institutional” money. A note from JP Morgan strategists said that if pension funds and insurance companies in the U.S., euro area, U.K. and Japan allocate even 1% of assets to bitcoin, that would result in additional bitcoin demand of $600 billion. Considering that bitcoin’s current market capitalization is about $356 billion, an additional $600 billion implies more than doubling of bitcoin’s price.
Two, the entry of institutional investors – especially insurance companies that typically invest for a longer-term horizon – bodes well for the trust meter of cryptos.
This is not to say that cryptos are safe. The threat of scams, security risks, and regulatory risks still looms.
In India, even though the Supreme Court has overturned the earlier ban by the RBI, the Court has not ruled on the legality of cryptocurrencies.
Meanwhile, “the RBI in response to a recent RTI said that there is no prohibition on banks undertaking crypto-related activities.” Indian banks are now exploring options to lend to crypto exchanges in exchange for bitcoin as collateral. If this is institutionalized, it would be a major milestone for the crypto market in India.
Please Note: This is not a financial advice or investment recommendation. Do your own research or consult a SEBI registered financial advisor.