There is always a lot of discussion and speculation in various Bitcoin forums trying to figure out when big institutional money such as hedge funds and major private equity groups are going to start moving into the Bitcoin space.
The reasons for this are obvious. These funds command trillions in wealth worldwide and even speculative positions from these players could have a major effect on the price and market cap of bitcoin.
However, it could be retail investors and smaller investment groups that fuel the next price rise ahead of major institutional money. This article will take a look at why the market may not be ready yet for big institutional towards the end, but first let’s look at why retail investors may be set to enter the market.
Having worked at a major UK brokerage in 2013 as an investment consultant, I spent every day consulting with retail investors which provided me with a great insight into their investing behaviour.
From my experience here are some of the reasons I believe they may soon look to invest in the Bitcoin market.
Brokerages offer a huge amount of Funds and Multi Manager Funds (funds that invest in other funds) they are an extremely popular investment vehicle for retail investors. The reason they are so popular is because many retail investors are very passive by nature, this is partly contributed to by the fact that many have full time jobs and in many cases they don’t have the time or interest to carry out in-depth research on many individual investments. It provides them with exposure to multiple types of investments, through one low maintenance security that is professionally managed for a small premium.
During the last bull run in Bitcoin during Q4 2013, there were no secondary market Bitcoin funds for retail investors, but this looks set to change towards Q3 and Q4 of 2014.
CEO Barry Silbert of SecondMarket Holdings, Inc, the company that set up the Bitcoin Investment Trust (BIT), have indicated that they are looking to expand the scope of their operations to make funds available for retail investors hopefully by Q4 this year.
In addition to this the Winklevoss twins are also well into the process of getting approval for their ‘Winklevoss Bitcoin Trust’ an exchange traded fund (ETF) which looks like it will list on the NASDAQ. Whilst it’s difficult to estimate when the regulatory process will be completed for the ETF, many commentators believe it could be finalised by Q4 2014 if not by early 2015.
The creation of these funds may help usher in a new wave of retail investment and the successful completion of the funds may be a catalyst for the creation of more Bitcoin secondary market funds in the future.
Confirmation of a trend:
The fact is the majority of retail investors always wait for the confirmation of a trend before investing, as retail investors by their nature are more risk averse less and less likely to be part of the ‘smart money’ that invests early in high risk investments.
Whilst Bitcoin is without a doubt still a high risk speculative investment, it has now been around for 5 ½ years and the Bitcoin economy continues to mature every day. With another potential move back above $1000 as many analysts are predicting in 2014, this may give the confidence that retail investors need to enter the market.
There are only so many times you can declare an asset is dead, after a price correction, before seeing it go to new highs to provide retail investors with the confidence they need to enter the market.
High Bitcoin price:
Whilst I have heard arguments from some early bitcoin investors that a higher bitcoin price may deter retail investors as the thought of spending 4 figures on a single bitcoin may not seem attractive. There are many reasons why this may not be the case.
One reason as we discussed earlier is to do with the secondary market funds. For example whilst a $1000 bitcoin price seems expensive for a single bitcoin, investing $2000 in a ETF and receiving 100 shares may sound more attractive than buying 2 single bitcoins.
Along the same lines, the proposal of changing the pricing of bitcoin to ‘Millibits’ (mBTC), may have the same psychological affect. For example buying 1,500 mBTC for $1500 may sound more appealing to a retail investor than purchasing 1.5 BTC.
Main Stream Media coverage:
During the late 2013 run up in the bitcoin price, there is one correlation I really noticed whilst working as an Investment Consultant that led me to believe that retail investors are much more reliant upon mainstream media (MSM) for their investment decisions.
It was not until the price started to reach $1000 dollars that we started to get multiple enquires of how and if clients were able to invest in Bitcoin whilst working at the brokerage.
This coincided with growing coverage in the MSM from sites such as CNBC , Bloomberg and Reuters as the price reached this distinct milestone.
The charts below show the google trend searches for ‘Bitcoin’ V the Bitcoin price as it neared and surpassed $1000.
It could be argued that a move back into the $1000 will likely ignite the MSM coverage again and increase interest from retail investors. Coupled with the fact that many retail investors will be more aware of Bitcoin from the previous spike and may soon have investment vehicles thy can then use to invest. This may lead to an influx of retail capital into the Bitcoin space.
Slowing global equity markets:
2014 has currently seen a significant slowdown in equity market returns globally, compared to recent years. It is these equities that currently make up a large percentage of many investment Funds and Multi Manager funds offered by major brokerages.
Whilst it is extremely difficult to gauge the future direction of the markets, due to massive market distortions from the likes of the Federal reserve through QE and their Permanent Open Market Operations (POMO). The decline in macroeconomic data and the appearance of tapering of these tools has currently led to weaker equity markets in 2014.
If this trend continues and ROI continues to lag for equities, we may see much more interest from retail invest towards Bitcoin. The reason for this is that during my time working as an Investment Consultant I noticed that retail investors in many cases use 4 main metrics when looking for an investment fund.
- Past price
- Current Price
- Historical Yield (Past performance of the security)
- Distribution yield (Total interest likely to be paid to you, by the fund divided by the fund’s value)
If these metrics start to decline for equity heavy weighted funds and the Bitcoin market continues its growth trend. We could potentially see a lot of money move out of these funds into Bitcoin specific funds (and or) other funds start to weight their portfolios to include Bitcoin funds (dependant on fund remit & regulation).
Whilst there are many potential variables to all the points above, there are a lot of reasons why retail investment may soon come into the Bitcoin space and help fuel the next possible upside move in Bitcoin.
A move back above $1000 and new secondary market funds would definitely be a great catalyst to start the process and this could lead to a much higher bitcoin price and market capitalisation.
The reason this is important is because this is of the main pre-requisites and incentives big institutional money like hedge funds and major private equity groups need to get involved in the market.
Reggie Middleton of ‘Boom Bust Blog’ recently highlighted this in one of his tweets:
— ReggieMiddleton (@ReggieMiddleton) May 15, 2014
In addition to this, without liquidity it is extremely difficult for big players to move in and out of the market without dramatically affecting the buy and sell price. Executing a bid or ask price in the tens of millions on any of the current main exchanges, would take out a huge amount of bids and asks in the order book. This would lead to a much higher buy price or much lower sell price when trying to execute a trade.
However, improved liquidity coupled with improved infrastructure, and derivative products for hedging could see the big institutional money start to invest in bitcoin and that could potentially take us closer to the much anticipated S-Curve adoption in the future.
I do not have any affiliations with the funds/products mentioned in this article. This article should not be viewed as an endorsement of the funds/products discussed. Please carry out your own extensive research before considering investing in any funds/products mentioned in this article.