(Bloomberg) — Bitcoin exchange-traded funds have been such a smashing success in the US that they now hold more than 1 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 Federal Reserve to sell some of its gold in order to fund the purchase of 1 million Bitcoin for a US government stockpile. In the corporate world, Michael Saylor’s software company MicroStrategy is sitting on about $38 billion 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 G-10, G-20 countries or institutions like BlackRock?” Connors said. “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 OGs 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 hodlers — 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.
Bitcoin and gold
A one-time crypto skeptic 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 1 million Bitcoin to add to that stockpile, leaving many market observers on the edge of their seats for any hint that he will.
The tantalizing 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 $500,000 or even $1 million become more common.
On paper, the Fed has plenty of gold — about $690 billion worth at current market prices — to sell to purchase a proposed quantity of Bitcoin currently valued at almost $100 billion. Yet the numbers are bound to change dramatically should the Lummis bill start gaining support from Trump and Congress: Expected 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 BTC 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 5 cents in 2010 to almost $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. When it comes to Satoshi himself — whose wallet is believed to hold 1.1 million Bitcoin — there is widespread speculation that he or she has passed away, leaving those tokens frozen forever.
Supply and demand
According to Glassnode, 65% of the Bitcoin outstanding hadn’t moved in more than a year as of mid-October.
Meanwhile, the supply of new Bitcoin keeps on shrinking, a key part of the blockchain’s design that’s meant to prevent it from succumbing to the type of inflation which strikes nations that run their money printers too hot. An annual increase in supply of about 164,250 Bitcoin, which is paid to the computerized operations known as miners that secure the network, is expected to only meet half the demand coming just from MicroStrategy and the proposed US government stockpile under the Lummis bill, if it happens, calculates Edward Chin, co-founder of Parataxis Capital.
“If you add buyers coming through the ETFs, which have already purchased a lot of BTC year-to-date, the demand figure moves higher,” Chin said. “Add to that other sovereign wealth funds, other non-US retail and other non-US institutional investors, there just won’t be enough BTC to satisfy demand unless price moves up meaningfully higher to compel existing holders to sell.”
As a result, the risks stemming from Bitcoin’s new concentrated ownership cohort is two-sided: Many of the eye-popping price forecasts for the original cryptocurrency, which once sounded like the pipe dreams of crypto fanatics, don’t seem as far-fetched as they once did.
Chin expects Bitcoin to climb to at least $500,000, depending on US government’s exact actions. But “we are likely closer to a $1 million BTC price in today’s dollars given BTC would effectively become part of the global monetary base the way gold is today,” he said.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.
