The Mythical Institutional Investor

TL;DR

1. Our current use of the term “institutional investor” oversimplifies the reality.

2. There are three distinct sources of “Big $” entering the Bitcoin (BTC) market.

3. Each source impacts the market in different ways and to different degrees.

4. Understanding these differences can help us longs anticipate and endure future market swings.

Introduction

Bitcoin (BTC) is currently the world’s greatest asset. Literally. Because of its finite supply and oversubscribed demand, it is quickly becoming the scarcest asset on the planet and is therefore the greatest store of value the world has ever known.

But wait…there’s more!

Not only it is superior in every way to other stores of value (e.g., gold, real estate, art) due to its fungibility, portability, divisibility, ease of storage, etc., but it is also the ultimate speculative growth asset because current investors are the “Innovators” illustrated in Rogers’ (2003) innovation adoption curve (N.B. depending on how one defines adoption, some would claim current investors are “Early Adopters.”)

Put another way, investing in BTC right now is like investing in the Series B round of a near can’t-miss asset that, oh by the way, has an immutably fixed supply of stock, so you as an investor know with 100% certainty that your “shares” will never be diluted beyond the prescribed inflation rate.

It is for this reason that “institutions” are now piling into BTC as quickly as they can. The problem is, BTC’s rabid fan base (of which I am a proud card-carrying member) fails to adequately define and differentiate the large sums of money (Big $) currently crashing upon BTC’s shores. Hence this Substack post.

Institutional Money?

After gathering and synthesizing all of the publicly available information I could find, one thing has become abundantly clear to me: there is no monolithic “institutional investor” piling into BTC at the moment despite the fact that Crypto Twitter (CT) and even mass media seem comfortable lumping all well-heeled buyers into a single “institutional investor” category.

Instead, there are actually three sources of Big $ raining from the skies:

1. Institutional Investors (e.g., MassMutual)

2. Institutional Traders (e.g., BlackRock, though not BlackRock - yet)

3. High Net Worth Individuals (e.g., many - but not all - GBTC investors)

This differentiation is not frivolous. Quite the opposite, it is critical because these sources of Big $ differ markedly in terms of their risk profile, time horizon and investing strategy, such that these differences will impact BTC’s price in different ways and to different degrees at different points of time.

Big $ Sources: Defined and Differentiated

Institutional Investors: MassMutual

True institutional investors, entities like MassMutual and to a lesser extent Microstrategy, are a source of Big $ that most retail HODLers should pray pile into BTC in a substantial way. The reason is simple: they too are HODLers, arguably even “longer & stronger” than all most retail HODLers, except perhaps for the most extreme BTC maximalists (looking at you, Dan Held and Max Keiser).

Because true institutional investors are most concerned with wealth preservation, they are looking for long-term stores of value to protect their treasury reserves - assets that are liquid, relatively stable in price, and retain their value over long periods of time (i.e., can act as inflation hedges when necessary).

In times past, assets like sovereign bonds could fulfill these reserve requirements, but virtually all sovereign bonds now yield negative real rates (i.e., after accounting for inflation), so gold has emerged as one of the few games left in town. Until Bitcoin, that is. But now that BTC is finally gaining the widespread recognition it has so thusly deserved, investors of all ilk are deciding that they can tolerate its volatility, at least for a while, because of its increasingly acknowledged superiority to gold. In fact, I am now convinced that BTC will supplant gold as the preferred/primary corporate treasury reserve asset of many institutional investors during this halving cycle; I do not consider this prediction reckless speculation.

See the graph below for an illustration of what I envision, a graph I created not so much to make predictions about the rate of BTC’s market cap growth relative to gold, but instead to illustrate how I think Bitcoin and gold will be two ships passing in the night during this halving cycle, with the former headed toward the shores of financial freedom and the latter toward an unforeseen iceberg. i.e., While I do not think (m)any central banks/governments will start replacing their gold reserves with Bitcoin during this halving cycle, I do think many corporate entities will adopt BTC over gold, which will simultaneous juice BTC’s market cap while draining that of gold’s.

In short, I believe true institutional investors like MassMutual fit the current stereotype of “institutional investor” drifting through BTC circles at the moment. More specifically, this source of Big $ is the most conservative of the three: they will invest the smallest percentage of investable assets into BTC, but because they see BTC primarily as a store of value rather than a speculative growth asset, they will be less sensitive to purchase price and have an extraordinarily long time horizon, potentially never selling their position (assuming of course there is no catastrophic threat to the network). For this reason, their BTC holdings could theoretically go into cold storage permanently, which would make the market less liquid and therefore raise the price floor permanently in the face of steady or even increasing demand (not a given, of course but a reasonable assumption, IMO, at least at the present moment).

Institutional Traders: BlackRock

Institutional traders are the second source of Big $ currently entering the BTC market, but their profile differs markedly from that of institutional investors. Hedge funds (e.g., BlackRock) and investment banks (e.g., Goldman Sachs) fit the institutional trader profile, and they essentially act in the polar opposite manner of institutional investors like MassMutual: they are far less conservative, are much more price sensitive, and have far shorter investment time horizons. Institutional traders will buy BTC (spot, options and futures), not because they see it is a store of value, but because it is still a volatile growth asset that can be repeatedly traded/leveraged to generate insane alpha.

More specifically, institutional traders will open large positions but will have significantly shorter time horizons than institutional investors, so they will enter and exit the market, in whole or in part, quite frequently. For this reason, institutional traders will cause huge price swings on a fairly regular basis and for the foreseeable future, at least until BTC’s market cap is dramatically larger and volatility diminishes.

Happily, as BTC’s market cap expands, volatility will necessarily decline, so these same institutional traders will begin looking for other assets to trade, thereby accelerating the decline of their impact on the BTC market. But for the remainder of this cycle at least, I think the volatility we have experienced recently will continue, even as BTC’s market cap expands, because the position sizes these traders open and close on a regular basis will be huge, relatively speaking (millions of USD).

In short, because most BTC supply is already HODLed (~78% per glassnode) and even more will become HODLed as more true institutional investors join the party, the market will become increasingly less liquid, leading to huge price swings when institutional traders enter and exit the market (fewer available coins in the float means more extreme bids will be required to induce existing owners into selling their coins in times of price appreciation and to induce would-be owners into buying coins in times of price depreciation). This prediction, I would argue, can in fact explain the double-dip we just had on January 4 and 5, respectively. I elaborate further below.

High-Net-Worth Individuals: Thurston Howell, III (dating myself)

High-net-worth (HNW) individuals comprise the third source of Big $ entering the BTC market. IMO, and perhaps contrary to popular belief, I do not think HNW individuals necessarily have “stronger hands” (more fortitude to tolerate violent downdrafts in price) than the average retail investor; they “only” have more money. In fact, I would argue that many HNW individuals actually have weaker hands than the average retail investor because they are inherently more risk intolerant (most people with money are more concerned about protecting what they have than they are about gaining even more, which is the opposite of us peasants, who are willing to regularly if foolishly risk our necks to try to get off the damned hamster wheel).

One famous example is Masayoshi Son, billionaire founder and CEO of SoftBank, who once invested in BTC but couldn’t tolerate the swings and ended up losing millions. Nevertheless, what does differentiate HNW individuals from this author and presumably most of you reading this post is the fact that they have a whole lot more 00s at the end of their bank account balances, and for that reason alone, they too can move the market up and down, if not individually so much any more, then collectively. Which is where entities like Grayscale come in.

Everyone on CT marvels at Grayscale’s exponentially growing assets under management (AUM) and lauds Barry Silbert and team for their “achievement,” as if the team is primarily responsible for Grayscale’s growth. No offense to Barry et al. because they should absolutely be commended for identifying a market opportunity and exploiting it so successfully, but the fact is, the team per se has very little to do with the exponential growth of their Grayscale Bitcoin Trust (GBTC). It is BTC’s rapidly appreciating price that deserves most of the credit, both because much of the increase is due directly to BTC’s increasing price, and because BTC’s increasing price attracts more attention (and thus more investors).

Put another way, as long as rapid price-appreciation continues, so too will HNW individuals continue FOMOing into BTC, whether it be through GBTC, Galaxy Digital, Anthony Scaramucci’s new SkyBridge Bitcoin Fund LP, or some other conduit. BUT, if/when the price starts plummeting in any meaningful way, you will be able to hear the sucking sound of their money exiting BTC from 1,000 miles away. In short, I think most HNW individuals are simply richer versions of the garden-variety FOMO/FUD-induced retail investor. As such, many will bail at the first sign of adversity, much like so many unseasoned smaller retail investors do. But when these fat cats exit en masse, it WILL move the market. Then again, this phenomenon cuts both ways - when BTC’s price repeatedly and continually rockets to new all-time highs, entities like Grayscale will continue buying every loose coin it can get its hands on. So by all means enjoy the rides up, but with the understanding that future downswings may be just as violent. may be just as violent. Let me explain.

The Market Impact of Different Big $ Sources

Congratulations. You’ve made it this far (or were savvy enough to cut to the chase). Whichever the case, the real question is, what do these different Big $ profiles tell us about future market price action?

Of course nothing is for certain, but this is my thesis:

1. Whenever true institutional investors like MassMutual open a position in BTC, the price floor will be forever raised. Whatever number of coins such investors buy will be locked away in cold storage, quite possibly forever, and I write that without a hint of hyperbole. Simply put, we should be able to consider virtually all such purchases as permanently added to the already obscenely large number of BTC being HODLed. The more coins HODLed, the fewer left in the float to be traded; the fewer left in the float to be traded, the higher the price current owners can command to sell their coins. All good. We want as many true institutional investors as possible entering BTC’s market, including and particularly central banks/governments, at least someday. They really will HODL forever, for reasons of national security if nothing else. In the meantime…

2. Institutional traders are going to make our lives a living nightmare, just as OG whales have for all these years. While the ever-increasing price floor will be a godsend to those who buy are able to buy below the floor, for those who buy above, they will be mercilessly tossed around like a rag doll while these new whales try to generate alpha via high-frequency trading, arbitrage, market manipulation, etc. All fair game in a truly free market (one of the many, many aspects of BTC I so truly cherish), but it will sting like hell until the floor is well above whatever price you buy in at. Thankfully, net volatility will be northward, particularly for the reasons I cite above, but we will nevertheless experience repeated and sometimes violent downdrafts while these new institutional trader whales play their money-making games. This in fact is what I think happened with the two separate, fairly steep midday pullbacks we had recently on January 4 and 5, respectively. For those who follow me on Twitter, you may have seen my address & coin distribution change posts, where I showed that the number of whales markedly increased shortly after the pullbacks occurred (see my tweet thread here down). That said, upon further reflection, I have come to the conclusion that these recent swings, while clearly market manipulation, IMO, were not inherently malevolent. Instead, they were simply a tax matter, meaning that I think many deep ITM (in-the-money) traders with large positions decided to lock in profits on the first regular trading day of the new year (after the conclusion of any trades that must be recorded in the 2020 tax year). i.e., They wanted to lock in profits but not have them taxed until 2021. While I can’t be 100% sure this is the case, I feel pretty confident it was a big part of at least the second swoon. The question, then, is what Big $ source(s) gobbled up all of the newly circulating coins? Unfortunately, it’s impossible to discern, at least from the data I have access to. But hopefully they were institutional investors. Sadly, this probably actually isn’t the case, simply because institutions move at a glacially slow pace for both regulatory and bureaucratic reasons, so I doubt any were ready to jump in feet first on Workday 1 of 2021. i.e., We should expect more volatility down the road, especially if price starts running again (the greater and faster the climb, the larger the incentive to lock in profits in anticipation of a subsequent pullback, especially if you’re a large enough whale that you can, at least in part, induce such a pullback, which brings me to Big $ Source 3 below).

3. Of all Big $ sources, HNW individuals are the ones that make me most uneasy. Why? They’re arguably just like any other retail investor: nervous wrecks who FOMO in and FUD out. But they have a whole lot more money, just like Mr. Son in my example above. That said, my one hope is that, because HNW individuals have such deep pockets, they will: 1) have advisors who will hopefully protect them from themselves, at least inhibiting the type of knee-jerk reaction I know I’ve been prone to in the past; and 2) they have deep enough pockets such that BTC is a much smaller fraction of their total portfolio than I think most of us retail investors would care to admit regarding our own portfolios. For these two reasons, along with other regulatory requirements of many investment trusts (e.g., required lock-up periods), I’m cautiously optimistic they too won’t FOMO in and FUD out as often as retail investors. But even if not, I’m afraid the swings induced by institutional traders will be exacerbated by these HNW individuals. While I can’t speak for you, I have my fill of volatility as it is, so here’s hoping for the best.

So there you have it. My thesis on the current state of so-called institutional investors. Because I myself, even as the author, cannot stand the thought of having to read this post again, let me conclude with a table summarizing my innumerable words into 15 cells for future reference:

If you find this article helpful or have any questions or comments, please do let me know via Twitter or one or more of the links below.

Go BTC.