Institutions, Regulations & the Price of Adoption
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| By Alex Benfield |
In past crypto cycles, early retail investors always brought up the inevitable welcoming of institutional money and institutional investors.
Cryptocurrency has always been somewhat of a taboo subject in the world of traditional finance, but crypto pioneers have been working to onboard those investors since the very beginning.
This is because TradFi pockets are incredibly deep. To say that the market capitalization of the crypto market pales in comparison would be an understatement.
So, if crypto investors could bring even a small fraction of that money into the world of cryptocurrency, the market would grow tremendously.
That wish came true sometime during the last market cycle, when institutions started investing in both crypto projects and the assets themselves.
However, unlike retail money, these institutions have a ton of red tape and rules to follow regarding what they can invest in. Therefore, some crypto pioneers helped create investment vehicles that would be more accessible to the world of institutional money.
One of the first and most famous of these vehicles is the Grayscale Bitcoin Trust (GBTC).
GBTC is a commodity and therefore subject to different regulations than spot Bitcoin (BTC, Tech/Adoption Grade “A-”), which makes it easier and more accessible for most regulated institutions to acquire.
With a much more accessible way to gain exposure to the crypto markets in GBTC, institutions finally began to enter this market in size, ballooning the market cap of GBTC to almost $10 billion in the spring of 2021.
In fact, when GBTC was first released, the demand was so strong that the product traded at a premium to spot BTC. This meant that shares of GBTC were more expensive than the underlying BTC itself.
The only reason for that premium being so high was the fact that GBTC was just that much more accessible for institutions that could not buy spot cryptocurrencies.
However, that market cap is now down to a little over $2.1 billion due to the cheaper price of Bitcoin today.
Additionally, there were downsides to this specific type of investment vehicle that became much more obvious after the GBTC premium turned into a discount.
For a while now, there have been rumors that Grayscale may try to convert GBTC into a spot exchange-traded fund. So far, there have been a few Bitcoin and crypto futures ETFs, but there have been no spot ETFs yet.
The difference with a spot ETF is that it is backed by the actual underlying asset as opposed to futures. That would mean the issuer of the ETF would have to hold spot crypto, which would obviously have direct impacts on the price and supply of the underlying asset.
Furthermore, in the case of Grayscale, it would remove the premium/discount on GBTC.
Just recently, some rumors have emerged that Grayscale might win its appeal case scheduled to start on March 7 with the Securities and Exchange Commission to convert to a spot ETF. While this is still just an early rumor at this point, it is certainly something to keep your eye on.
A decision like that would have profound impacts not only on the crypto market, but potentially with regulation as well.
It could open the door for additional spot ETFs, which would further increase exposure and adoption of cryptocurrencies to institutional investors, likely bringing a lot more money into this space.
Should Grayscale win that decision now, just after the crypto bear market has bottomed out and sentiment has started to shift toward the bulls again …
That would be like adding rocket fuel to a firework show.
Now, this week’s price action has not been as exciting, as prices have been on a downward slide since the week started.
Remember, though, that this skid has taken place after a massive rally off the bear market lows and a swift recovery from what looked like the start of a price correction two weeks ago.
The price action during the month of February has been a little out of the ordinary, so I would not get too caught up on the fact that BTC is down 5% on the week. After all, things could turn bullish again very quickly.
Right now, BTC is trading at just under $24,000, and has some significant resistance overhead at about $25,000.
Aside from the Grayscale rumor from earlier this week, things have been quiet, so the market is just feeling itself out at these price levels. We will see if anything changes as we move forward.
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Meanwhile, Ethereum (ETH, Tech/Adoption Grade “B”) has been trading a bit weaker than Bitcoin over the past few weeks, and has now slipped below the $1,650 resistance level that it had been flirting with for weeks.
ETH is still trading well above its 200-week moving average, but if the bulls do not come in to save it here, it could go to retest that level which is sitting at just under $1,450.
If ETH loses ground here, expect the rest of the altcoin market to show short-term weakness as well.
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What’s Next
It has been a relatively quiet week so far, despite a mild price slide in most cryptocurrencies.
This drop in prices was not due to any bad news or narrative and could just be explained by some buyer exhaustion. We will see if our market leaders can turn things around as we finish out the week.
We will hear the start of the Grayscale appeal case in just about two weeks as well, which could have even further implications on what has already been an incredibly active regulatory environment to start 2023.
Make sure to stay tuned in, as we will keep you updated as things develop.
Best,
Alex
