Analyzing Wall Street’s gravitation toward digital currencies

Green traffic light at the beginning of Wall Street, New York

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In the early years of digital currencies like bitcoin, they were largely thought of as a mysterious, momentary trend not worthy of much consideration from the general public. Throughout the second half of the 2010s, that perception evolved to position digital currencies as a more viable yet still alternative asset class within investment portfolios – especially in times of economic uncertainty.

Only in the last few years have bitcoin, ether, and other virtual currencies begun to truly pick up steam in the mainstream marketplace – a trend that has skyrocketed of late thanks primarily to increased involvement from institutional investors and the millennial population.

Unprecedented bitcoin boom

This increased adoption has coincided with the historic performance of bitcoin, which saw its price surpass $40,000 for the first time ever at the beginning of 2021. We have seen dramatic bitcoin price increases in the past – in 2017, particularly – but the key difference this time is the sharp uptick in institutional involvement.

Institutional demand continues to grow, as shown by Grayscale’s Bitcoin Trust’s (GBTC) premium rising above 30% in December of 2020.

What is Grayscale’s Bitcoin Trust?

GBTC is an institutional vehicle that is tradeable in the U.S. through over-the-counter markets. Institutional investors typically rely on GBTC as a means of gaining exposure to bitcoin without the heightened short-term risk and volatility it is known for. Because there is not yet a bitcoin ETF in the U.S., GBTC has become the go-to option for institutional entry into the crypto space.

How much is GBTC worth?

At the time of writing, each share of GBTC represents .00094809 bitcoin, meaning buying one share of the trust is equal to buying .095% of one bitcoin.

But what really matters here is what the GBTC premium increase represents. When the premium increases, it typically signifies a bullish trend and an overall increase in investor interest in bitcoin.

chart of gbtc price from august 2020 to january 2021

Bitcoin vs. Gold

As economic uncertainty has grown amid the COVID-19 pandemic, an increasing number of investors have begun turning to bitcoin and other forms of crypto as a safe-haven hedge against the current unpredictability of stocks and bonds. For decades, gold has served as the go-to safety net in challenging economic times as more money is printed and inflation continues to rise.

Bitcoin is by nature a deflationary asset, meaning that over time, its buying power is designed to increase in stark contrast to that of fiat currency. JPMorgan has even gone so far as to say bitcoin could rally as high as $146,000 in the long term as it competes with gold on this front – as long as its price volatility can drop in order to boost mainstream confidence.

Increased interest in ether

Bitcoin is not the only digital asset experiencing historic highs. According to Coinbase’s annual review for 2020, an increasing number of institutional investors are also seeing ether as a store of value and are starting to buy in. Coinbase also notes that many of these investors are the same that were buying bitcoin throughout 2020.

In December of 2020, CME announced it will launch a futures contract for ether, the virtual token that powers the Ethereum network, in February of 2021. This will give investors an opportunity to hedge their spot positions, reduce their overall risk when investing in ether, and provide a way for them to take speculative positions.

Ethereum 2.0 staking also drives this increased interest in ether because of the rewards investors will gain in the form of annualized interest on their holdings.

The millennial crypto surge

While institutional investors are playing a leading role in propelling the positions of bitcoin and ether, millennials are also helping carry digital assets into the mainstream on Wall Street. Research has found that cryptocurrencies are three times more popular as a long-term investment vehicle among millennials that any other generation.

Financial advisory firm deVere also found that more than two-thirds of the more than 700 millennial clients it surveyed said they preferred bitcoin to gold as a safe-haven asset.

FinTech Magazine cites three key reasons for crypto’s popularity among millennials:

  1. Bitcoin’s historically high annual returns throughout the last decade
  2. Millennials’ longer time horizons making up for crypto’s shorter-term volatility
  3. Millennials’ familiarity and upbringing within the digital space

Central banks issuing own digital currencies

With so much widespread adoption of cryptocurrency in various circles, it is no surprise central banks are laying out their own plans to get involved. A 2020 survey by the Bank for International Settlements found that one-fifth of central banks will likely issue some form of digital currency in the next six years, with almost all major central banks now thought to be engaged in central bank digital currency (CBDC) research.

In a joint venture known as S&P Dow Jones Indices, S&P Global, CME, and News Corp are also coming together to debut cryptocurrency indexes in 2021. The group is partnering with U.S.-based blockchain data provider Lukka to launch the indexes which will cover 550 cryptocurrencies with the goal of providing independent, reliable, and user-friendly benchmarks for digital assets.

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