Day by day, Bitcoin's (BTC -2.12%) unique characteristics, which make it unlike any other asset in the world, are becoming increasingly recognized and understood by investors. The recent approval of spot Bitcoin exchange-traded funds (ETFs) will amplify this understanding, as these ETFs simplify the process for investors to gain exposure to Bitcoin.
While the approval of spot Bitcoin ETFs has been widely celebrated as an unofficial stamp of legitimacy, signaling that Bitcoin is here to stay, there is another crucial dimension to consider. Once this is fully understood, it will become evident that Bitcoin has the potential to reach the coveted $1 million price tag.
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Understanding the current landscape
The approval of spot Bitcoin ETFs revolutionizes how the average investor, or retail investor, can add Bitcoin exposure to their portfolios. By simply purchasing shares of one of these ETFs through their brokerage, investors can now bypass the complexities of navigating cryptocurrency exchanges and managing digital wallets.
This development has the potential to significantly increase demand for Bitcoin's limited and diminishing supply. However, as transformative as this increased access for retail investors is, it will pale in comparison to the tidal wave of demand anticipated from institutional investors entering the market.
Before diving into the numbers, it's essential to understand who institutional investors are. For a long time, I heard Bitcoin enthusiasts claim that institutions were coming, but I never fully grasped what that meant. Institutional investors are organizations that invest money on behalf of their clients. These include pension funds, retirement plans, sovereign wealth funds, and hedge funds, among others. Essentially, they manage and invest vast sums of money.
Prior to the approval of spot Bitcoin ETFs, institutions were either prohibited from entering or hesitant to enter the Bitcoin market due to the complexities associated with owning digital assets. However, with the advent of these ETFs, institutions can now easily incorporate Bitcoin into their extensive portfolios, opening the door to a significant influx of institutional capital into the Bitcoin market.
Time to crunch some numbers
But just how impactful will these institutions be? As of May 15, it was estimated that around 700 professional investment firms own around $5 billion worth of these spot Bitcoin ETFs. Leading the way is Millennium Management, an investment firm that manages more than $64 billion, with $1.8 billion tied to Bitcoin ETFs, around 3% of its total portfolio. But the list goes on and includes the likes of Morgan Stanley (the sixth-largest bank in the U.S.), Bracebridge Capital (a hedge fund that manages investments for Yale and Princeton), and even the State of Wisconsin Investment Board.
However, as it currently stands, retail investors are the primary owners of the spot Bitcoin ETFs. Reports suggest that around 10% of all the assets tied to the ETFs come from institutions. But this number is growing and will continue to do so.
The influx of institutions into the Bitcoin market will likely be gradual, as they typically engage in extensive due diligence before making allocations. Unlike retail investors, who can swiftly enter the market by purchasing shares of an ETF, institutions often take time to research Bitcoin's impact on their portfolios before making small allocations.
Yet, after conducting their research, I think they will all likely arrive at the same conclusion: Bitcoin's inherent characteristics make it a necessity in portfolios. Eventually, widespread adoption among institutional investors will occur, leading to a tsunami of capital flowing in.
There's no telling just how much money, but based on recent studies claiming that a 5% allocation is the ideal amount of exposure, we can begin to estimate the potential impact of institutional investors. With 5% of the vast $129 trillion in assets they manage, Bitcoin's market cap could soar to more than $7 trillion and its price beyond $400,000.
However, some analysts argue that a 5% allocation might be too conservative. Most notably, a recent ARK Invest study suggests that the ideal exposure level should be closer to 19%. If this were to occur, Bitcoin's price could soar to over $1.3 million.
The little-known theory that comes into play
What we are witnessing marks the onset of a fascinating phenomenon: game theory. In essence, game theory suggests that rational actors, in this case, institutional investors, will strategically act in their best interest based on the actions of others.
As institutions observe their peers reaping the benefits of Bitcoin investments, they will inevitably face pressure to join the fray or risk being left behind in the race for returns. This dynamic, driven by the desire to outperform peers and secure maximum returns, will likely fuel a surge in Bitcoin adoption and investment unlike any we have seen before.
While retail investors have played a significant role in Bitcoin's journey thus far and will remain an important cohort, the entry of institutions represents a paradigm shift. The sheer scale and resources at their disposal will not only amplify Bitcoin's market dynamics but also inject a new level of competition and urgency. As institutions vie for supremacy and seek to capitalize on Bitcoin's potential, the game is set to evolve in unforeseen ways and send Bitcoin to new heights.
