Serious money is fuelling the Bitcoin rally

BITCOIN, the world’s largest cryptocurrency, touched a new high of US$73,797.68 around mid-March, propelled by institutional demand, including interest in Bitcoin exchange-traded funds (ETFs).

“This is very much an institutional story,” said Lasanka Perera, the chief executive officer of cryptocurrency exchange Independent Reserve.

Capital inflows to spot Bitcoin ETFs hit US$2.5 billion for the week of Mar 11 to 15, according to BitMEX research data, beating the previous record of US$2.3 billion for the week of Feb 12 to 16.

Institutional demand for these ETFs has surpassed market expectations. Since their launch on Jan 11, inflows hit US$13.2 billion as at March 19.

The United States Securities and Exchange Commission’s approval for spot Bitcoin ETFs blew the gates wide open for institutional money that had for long remained on the sidelines of the crypto game.

Most institutional investment mandates do not allow for the holding of crypto, but do allow for investment into ETFs.

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“The ETFs have made Bitcoin accessible to these investors who don’t have the risk appetite, infrastructure or expertise,” said Perera.

His comments were echoed by several other industry players.

Kelvin See, head of trading at crypto exchange Coinhako and Lennix Lai, chief commercial officer at crypto exchange OKX, both said the composition of the market for Bitcoin is changing.

There is less speculation, and there are fewer retail investors trading in the market with leverage.

Bitcoin’s rally may also have something to do with an event called “the halving”. Once every four years, Bitcoin’s formula halves the number of Bitcoins that miners can extract.

Previous halvings have coincided with a bull run. After the last halving in May 2020, Bitcoin prices rose to a high of US$67,549 on Nov 9, 2021 – a gain of 688.31 per cent over 546 days, according to CCData, a crypto data tracker.

As at Sunday (Mar 24), the price of Bitcoin was hovering around the US$65,000 mark.

See believes this year’s interest rate cuts could also support the Bitcoin rally. Lower interest rates typically reduce the attractiveness of low-risk investments such as bonds, and push investors towards riskier asset classes.

The real indicator of how serious institutional investors are about Bitcoin, however, is whether they stay invested through a down cycle.

“Will they liquidate when they see volatility and there’s a drawdown on Bitcoin? That remains to be seen,” said Perera.

Bitcoin and other cryptos are relatively volatile, meaning their prices fluctuate within a broader range and with greater frequency.

The term “hold on for dear life” – typically abbreviated as HODL – gained currency in the industry as investors encouraged each other to keep the crypto faith amid wild swings.

Some recent studies have suggested Bitcoin is no longer as volatile as most believe, and billions of institutional capital could well tame the asset further.

In fact, Coinhako’s See thinks institutional investors have greater holding power. Unlike retail investors, institutions tend to diversify their portfolios and take measured positions.

“The more serious investors come in, the (greater the likelihood that) heavy drawdowns are less likely or frequent,” he said.