Author: Maxim Bederov, a venture capitalist and serial entrepreneur

The tide has turned. Analysts at investment banks now put Bitcoin not only on a par with every other asset class but actually suggest that cryptoassets have superseded gold, equities and treasuries.

The most recent of these is JP Morgan. America’s richest bank and the world’s fourth-wealthiest — China takes the top three spots — has completed a stunning volte face on crypto. It now extends not only to providing banking services to exchanges Coinbase and Gemini, but also to a begrudging acceptance that Bitcoin “is likely to survive” beyond the coronavirus pandemic and massive stimulus measures by central banks.

In an 11 June client note to fixed-income investors obtained by CoinDesk, the bank’s bond analysts found that while Bitcoin “saw among the most severe drops in liquidity around the peak of the crisis in March, that disruption was cured much faster than other asset classes”.

Researchers found that in the wake of the worst stock market crash since 1987’s Black Monday, liquidity in the cryptoasset market bounced back more quickly and was more resilient than in  traditional investable financial instruments.

“At this point, Bitcoin market depth is above its one-year trailing average, while liquidity [elsewhere] has yet to recover,” the analysts wrote. 

Seeing incontrovertible data like this must be galling to the banks that once dismissed Bitcoin as irrelevant, or a bubble, or, like Warren Buffett, maligned the entire asset class as “rat poison squared”.

QE depression

At a time when central banks are engaged in open-ended and  near-unlimited quantitative easing to artificially inflate flagging economies, Bitcoin and altcoins are attracting rapidly-increasing interest from institutional players.

Once central banks cross the Rubicon, and their economies continue to trend further into recession, they are backed into a corner. There is nowhere else to go but further into negative interest rate territory.

In normally-functioning economies, lenders insist on borrowers paying them interest for lending them money. With near-zero or even negative rates, this is no longer the case.

And the longer this situation lasts, the more chance there is that the policy will depress economic growth, rather than stimulating it. Persistently low rates stifle banks’ ability to profit from loans and mortgages. This hurts their net interest margin and creates a spiral where they are less able, not more able, to lend money to businesses and individuals.

And while the UK is generally less profligate than the heavy-spending US Fed, we have just heard from a consensus of economists that the Bank of England is forecast in June to unleash another £100bn of quantitative easing, and hold rates at a historically low 0.1%.

The net result of quantitative easing is that equities are much more volatile, and yields fall through the floor.

Allied to this is that returns from cash investments and traditionally more secure investments like government and municipal bonds are depressed, encouraging investors both retail and corporate to explore alternative options.

A kind of cascade effect is in action here. Pension funds, asset managers, family offices and university endowment funds have monumental amounts of capital to deploy.

Ivy League universities like Harvard in particular, have been allocating portions of their capital to crypto companies and assets since 2019.

More recently, money flow data from the Bank of America in the wake of the stock market crash saw institutional investors sitting on a record $4.5 trillion over fears about further equity collapses.

Architecture

Back in February, Switzerland’s stock exchange owner SIX took a stake in digital asset trading platform Omniex. “We see a growing need in the market to access cryptocurrencies,” said Thomas Zeeb, SIX’s head of securities and exchanges.

Omniex will give SIX and its digital exchange SDX a gateway to exchanges and over the counter (OTC) market makers.

The idea that institutional investors are swerving digital assets is crumbling day by day.

 Research by Fidelity, one of the world’s largest asset managers, found in a four-month survey of institutional clients in the US and Europe to March 2020 that 36% were already invested, and at least 60% of its institutional clients wanted exposure to Bitcoin or other cryptoassets.

All the while, efforts to further integrate blockchain and Bitcoin into financial infrastructure continues apace.

Nasdaq announced in April it would use the R3 Corda blockchain on its institutional-grade offerings for digital asset exchanges. At almost the same moment,  VC firm Andreessen Horowitz completed a $515m fundraise for its second crypto-based a16z fund to invest in cryptocurrency networks and businesses.

And in March the $2.2bn-rated crypto asset manager Grayscale reported another record-breaking quarter of inflows into its investment products in Q1 2020. GBTC, Grayscale’s Bitcoin Trust topped the list, with inflows reaching $388.9m, 52% larger than its previous record of $254.8m in Q4 2019 .

Given the broader macroeconomic backdrop of a sensational market rout, the steepest drop in asset prices in 30 years, warnings from the Bank of England about the worst economic crisis in centuries approaching, these numbers are particularly interesting.

In truth, all this wrangling about Bitcoin is immaterial.

Institutional service providers like trillion-dollar stock exchanges and money managers are asset-agnostic. Wherever the big money wants to be, there they will go.