In 2021, the interest of large institutional investors in Bitcoin increased even more.
The financial products that have increased interest in Bitcoin from institutional investors
Interestingly enough, it didn’t just increase at the beginning of the year during the first bull run, but also increased in the second and third quarters when the price dropped and lateralized for a while before starting the second bull run.
Much of this increase in interest is probably due to new financial products being issued on the traditional markets to allow people to take a position on the price of Bitcoin even without owning it.
Probably the most widely used instrument is still the Grayscale Bitcoin Trust (GBTC), i.e. a fund entirely backed by physical BTC, which is being converted into an ETF on the New York Stock Exchange. It is no coincidence that Morgan Stanley decided in the third quarter to use this very vehicle to invest $300 million in Bitcoin.
However, even the first ETF ever approved on the US market to replicate the price of BTC, the Proshares Bitcoin Strategy ETF (BITO), which was launched last month on the New York Stock Exchange and is based on Bitcoin price futures contracts, has been an immediate success, probably because it makes it possible to take a position on the price of BTC using the instruments already in use by investors.
Bitcoin hedging against inflation
Thanks to these tools, Bitcoin is now an asset that has become part of the portfolio of many investors, including institutional ones. Its peculiarity is that it is used instead of gold as a risk-on hedge against inflation, while gold continues to be used as a risk-off hedge against inflation.
In this way, it is de facto an additional tool especially for investors who have complex investment strategies, i.e. who do not just try to buy assets at low prices and then sell them at higher prices.
Professional investors, and in particular institutional investors, are not afraid of risk, and risk management is often one of their best weapons. In such a scenario, BTC manages to carve out a role for itself, even within those traditional financial markets that are dominated by large institutional investors.
For example, bond investment funds are now dealing with very low real returns due to rising inflation, but even gold is failing to deliver high returns. Bitcoin can then also become part of their portfolio as a risk-on investment that could offset the very low returns of risk-off investments.
In particular, equity funds seem to be the most exposed to BTC, probably because they fear that a possible rise in interest rates, due to rising inflation, could still cause their portfolio prices to fall in the medium term.
A growing market
It is worth noting that institutional exposure to the price of Bitcoin is generally minimal, if not negligible, compared to other asset classes, but it is growing, and in some rare cases has even increased from 2% to 30%.
However, this is still a fledgling market, in many ways immature, but one that offers volatility not found in other markets. And it is precisely this volatility that often attracts investors, particularly those who are looking for a little more risk so as not to have to settle for only very low returns.
The very fact that institutional investor interest in Bitcoin has increased again this year, and even after the drop in May, in the same year that many equity indices have essentially continued to rise by setting new all-time highs, speaks volumes about the need to take a bit more risk.
With the Fed’s mega-monetary stimulus campaign and the resulting galloping inflation, the old yields are no longer enough to meet investors’ expectations. Against this backdrop, it is hardly surprising that many are turning their attention to Bitcoin.