FILE PHOTO: FILE PHOTO: Illustration of bitcoin
NEW YORK: Bitcoin exchange-traded funds (ETFs) have been such a smashing success in the United States that they now hold more than one million of the tokens, or about 5% of what currently exists.
That’s in the same ballpark as the amounts that have long been frozen in the wallet of the market’s original whale: The cryptocurrency’s anonymous and enigmatic creator known as Satoshi Nakamoto.
Another buyer of equal size potentially may arrive on the scene, as a Senate ally of Donald Trump’s pushes to pass a bill that would require the US Federal Reserve (Fed) to sell some of its gold in order to fund the purchase of one million bitcoin for a US government stockpile.
In the corporate world, Michael Saylor’s software company MicroStrategy is sitting on about US$38bil worth of the tokens and has been tapping capital markets to buy more.
All of these developments were unthinkable in bitcoin’s early days not so long ago, when each token traded for pennies and the only people interested in it were young Libertarian techies seeking to create a subversive financial system immune to the influence of the government, Wall Street intermediaries and other big corporations.
Oh, how times have changed. Now these same establishment institutions are taking over larger and larger swathes of the available bitcoin.
And the potential creation of a US national stockpile of the cryptocurrency could trigger more governments to buy up bitcoin, said Mark Connors, founder and chief investment strategist at Risk Dimensions. It all adds up to what’s known as concentration risk.
“Will this be a risk of being concentrated by existing G10, G20 countries or institutions like BlackRock?” Connors asked. “This is a concern, especially for the purists.”
Yet you won’t hear much complaining, even among the purists.
One reason is simply that the overwhelming demand keeps sending the price higher and higher – at least for now – and hope is rampant that it continues to do so.
Another reason is that, unlike the ownership of a company’s stock, the underlying programming of the bitcoin blockchain prohibits even the biggest holders from exerting any control over the way it operates.
“The bitcoin operational guidance systems no longer have control of the global crypto markets, even if they have made the highest profits,” said longtime crypto investor Michael Terpin.
“Ownership of large amounts of bitcoin is different from control of bitcoin. Governments own a large portion of the world’s gold, but they don’t have control over its price or utility. The same will eventually be the case with bitcoin.”
Still, with concentrated ownership of the cryptocurrency come risks for everyone involved with bitcoin.
Many of the bitcoin ETFs’ individual owners aren’t so-called holders – determined not to sell bitcoin through thick and thin.
They may, instead, flee the market if and when the coin’s price crashes, and that could potentially exacerbate bitcoin’s already highly volatile moves.
The other potential new whale in the market is the US government itself, which is swinging from being one of the crypto industry’s biggest antagonists to one of its biggest cheerleaders as Trump prepares to return to the White House.
A one-time crypto sceptic turned vocal promoter, Trump has promised to create a government stockpile, and it’s expected to be based on the more than 200,000 bitcoin that the government already holds following asset seizures.
He has yet to endorse Wyoming Senator Cynthia Lummis’s bill to sell Fed gold certificates to buy one million bitcoin to add to that stockpile, leaving many market observers on the edge of their seats for any hint that he will.
The tantalising prospect of a US strategic bitcoin reserve is already creating risk for investors chasing the token’s price higher and higher, as forecasts for it to reach US$500,000 or even US$1mil become more common.
On paper, the Fed has plenty of gold – about US$690bil worth at current market prices – to sell to purchase a proposed quantity of bitcoin currently valued at almost US$100bil.
Yet the numbers are bound to change dramatically should the Lummis bill start gaining support from Trump and Congress.
It’s expected that large sales of gold by the government would likely cause the precious metal’s price to drop, while telegraphed plans to buy large amounts of bitcoin would likely cause its price to surge. However, there is no guarantee that Trump will succeed in creating the stockpile, let alone that there’s enough support in Congress to pass a bill to sell a precious metal that’s been an accepted store of wealth for millennia in order to buy a 15-year-old form of Internet money famous for its boom-and-bust price swings and reputation as the currency of choice for scam artists.
Trading on the crypto-based predictions platform Polymarket implies only about a 28% chance a bitcoin reserve is created in Trump’s first 100 days.
And should the reserve actually be created and further purchases funded, the risks may only grow in the longer term.
“Sure, the price would surge,” said Noelle Acheson, author of the Crypto Is Macro Now newsletter.
“But the market would become more vulnerable to a change of administration, for instance.
“Or even a change of mind from the current one could lead to a flood of selling pressure on the market and a crash that could destroy value for holders around the world, many of whom are counting on bitcoin to protect them from long-term currency debasement.”
For now, however, as the market waits for Trump and a new Congress to arrive, there’s a honeymoon period in which it’s hard to find many investors who are bearish on bitcoin in the short term.
After all, it’s an asset whose price has risen from five US cents in 2010 to almost US$100,000 today, and the ETFs have reduced much of the perceived risk of being exposed to a crypto-native startup like FTX, which blew up in 2022 and spread contagion throughout the crypto industry.
Matt Hougan, chief investment officer at bitcoin ETF issuer Bitwise, said in an interview that starting in early October, 40% of the meetings he had with registered investment advisers and institutions resulted in allocations, up from 10% previously.
He’s not the only one seeing such interest.
“My phone is ringing nonstop,” Matthew Sigel, head of digital-asset research at Bitcoin ETF issuer VanEck, said in an interview. “RIAs in particular seem motivated to get off 0%” crypto asset allocation.
As the demand grows and the wallets of the market’s institutional whales grow bigger, there just aren’t enough sellers to keep a lid on prices, especially when it comes to those OG bitcoiners who are reluctant to ever sell.
Then there is a certain unknown percentage of bitcoin that will never change hands due to forgotten passwords or lost hard drives containing keys to bitcoin wallets. — Bloomberg
