Bitcoin (BTC -1.13%) has pulled back from its all-time high set last month, but many investors may be hesitant to invest at the current price. After all, Bitcoin has rallied about 50% since the start of the year even after falling off its new high. That's left some people thinking they missed the opportunity to buy Bitcoin and that the potential future return doesn't justify its current price.
But there's still a big catalyst that could drive the price of the cryptocurrency much higher over the long run. While the impending Bitcoin halving could have a momentary impact on prices, this factor stands to propel Bitcoin to sustainably higher highs over a multiyear period. And there's still time to get in.
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The biggest reason there's still time to buy Bitcoin
Despite the long-standing and growing interest in Bitcoin and cryptocurrency from investors, the asset class has yet to reach a meaningful level of institutional adoption. Institutional investors account for the vast majority of investable assets in the world. So, if you see an increase in Bitcoin adoption from institutional investors while Bitcoin remains supply constricted, as designed, the price of Bitcoin will have to increase.
The recent introduction of 11 Bitcoin exchange-traded funds (ETFs) could be a factor that drives more institutional investors to buy Bitcoin. Although there were numerous ways for investors to gain exposure to Bitcoin and other cryptocurrency assets, the new Bitcoin ETFs give shareholders a direct stake in the funds' Bitcoin holdings. At the same time, investors don't have to deal with the technical and security hurdles involved with owning Bitcoin directly.
An analogy can be made to the introduction of gold ETFs. Although investors could gain exposure to the precious metal by investing in companies like gold miners, investing in an ETF gives the shareholder a direct stake in physical gold without having to take possession of it and ensure its security. That's why about half of institutional investors use gold ETFs for their gold allocation while just 17% use physical bullion.
If the pattern holds, the use of Bitcoin ETFs could double the potential for institutional investors to invest in Bitcoin. But to get there, investors want to see more regulation to provide a sense of security. As regulators develop more rules around cryptocurrency and investors become more comfortable holding it, there should be a big increase in institutional investor participation.
Just how big could adoption get?
As a group, institutional investors have put 4% of capital to work by investing in gold and gold-related assets. That's a high bar for Bitcoin to reach. Gold has had value, or at least the perception of value, since ancient times.
But from an investment perspective, analysts have found a combination of Bitcoin and gold to be a better risk-adjusted investment than either individual asset alone. The ratio most commonly suggested is 80% gold to 20% Bitcoin. In that case, 0.75% to 1% of world investable assets could flow into Bitcoin over time.
And while that might not sound like much, consider that there's about $250 trillion in investable assets in the world, primarily held by institutions. If 1% flows into Bitcoin, that's $2.5 trillion in increased demand. The current market cap of Bitcoin is about $1.3 trillion. In other words, there's a lot of room for the price to increase with just a small adoption among institutional investors.
Cathie Wood's Ark Invest estimates that a 1% allocation toward Bitcoin from institutional investors would push the price per coin to $120,000. A 4.8% allocation would push it to $550,000.
We're still at the very early stages of institutional adoption. But as products like the new Bitcoin ETFs make it easier to invest in the leading cryptocurrency, there should be a rapid increase in money flowing into the asset class. It's not too late to buy Bitcoin. In fact, the recent pullback may be a great opportunity for investors.
