The CEO of Wall Street's biggest bank says it has no value. A highly respected Wall Street analyst calls it markedly undervalued. Billionaire investor Mark Cuban (who bought some on a Swedish exchange) says the issue of its value is irrelevant. Paypal founder Peter Thiel says its transactional use notwithsatnding, people are underestimating its worth as a reserve currency and store of value. What is it? You guessed it - bitcoin.
New Tech, Old Joke
To paraphrase an old joke: if you want 5 different opinions on bitcoin, just ask 3 experts. It seems like everyone is weighing in on bitcoin these days and that fact alone is extremely telling. It tells us that investors are showing more and more interest in cryptocurrencies every day and they are naturally asking their bankers, brokers and financial advisers about it ... and guess what? The so-called "experts", though never at a loss for words, are not quite sure what to say.
In one of the most astonishing signs of bitcoin's explosive growth among investors new to cryptocurrencies, the popular online wallet provider coinbase opens approximately 35,000 new wallet accounts every day. No that's not a typo - 35 thousand new wallets are opened on coinbase EVERY DAY!
These intrepid individual investors opening wallets on coinbase and other providers are early adopters - they've decided to jump into the cryptocurrency space themselves by taking matters into their own hands - but they represent just the tip of a massive iceberg.
Imagine all the millions of investors who are just slightly too timid to take the plunge themselves and are instead waiting for their stodgy, sclerotic, old institutions to give them the green light to invest in cryptocurrencies. There's a veritable tsunami of cash that is about to hit the cryptocurrency markets as soon as they are greenlighted by a major institutional investor.
We follow the cryptocurrency news meticulously and judging from all the rumblings we see about institutional investors preparing to fully embrace cryptocurrencies as an asset class, it looks like that tsunami of cash is rapidly approaching. And of course as soon as one old-school institution jumps in, the others will be stampeding to rapidly grab their share of this exploding market.
Here's a synopsis of how all that institutional cash is likely to hit the bitcoin market.
"A New Revenue Pool"
According to a Bank of America Merrill Lynch report, cryptocurrencies could represent a major revenue stream for Wall Street exchanges, in the range of $1.6 billion. This estimate is conservative, based on less than 10% of the fees generated by fiat currency trading. When you consider the fact that current daily forex volume is approximately $3 trillion, and bitcoin daily trading volume has increased more than ten-fold this year alone from $57 million to $628 million, it's easy to see that if bitcoin's exponential growth were to continue, bolstered by institutional cash and trading volume, the potential revenue stream for Wall Street is far greater than the Merrill report conservatively suggests.
One major reason for this disparity is that the very same report says that The CBOE, America's biggest options exchange, is best positioned to reap the early rewards of embracing cryptocurrency because of their partnership with Gemini, a digital asset exchange started by Tyler and Cameron Winklevoss, and a plan to roll out a bitcoin futures contract early next year.
An earlier attempt by CBOE and Bats Global Markets to list an exchange-traded bitcoin fund was rejected by SEC regulators who cited the lack of "surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity."
The Merrill report sees a clear solution to the surveillance issue: "The ETF and futures contracts do not depend on each other, but clearly, they would be reinforcing." And if applying existing exchange technology to bitcoin works, "this creates a new revenue pool for the exchange industry."
Clearing Regulatory Hurdles
Let's take the reasoning of the Merrill report one step further. Once the regulatory hurdles are overcome, we're now talking about bringing the daily volume of CBOE, which is more than 3.6 million equity and index contracts, to the cryptocurrency space - giving everyone who trades on CBOE access to cryptocurrency futures contracts, and this number represents a mere 22% of trading volume of major US exchanges, who would certainly not want to miss out on their slice of what the Merrill report calls "a new revenue pool for the exchange industry".
CBOE is positioned best to profit at the inception, since it's CEO, Edward Tilly has embraced bitcoin, if not so much out of enthusiasm then perhaps out of resignation, "like it or not, people want exposure to bitcoin" says Tilly. But certainly the other major exchanges such as NASDAQ and the Chicago Mercantile Exchange, won't allow themselves to be left behind.
An Exchange Traded Fund
At the moment, the only investment vehicle that gives institutional investors access to bitcoin is Bitcoin Investment Trust trading under the ticker symbol GBTC. The trust holds bitcoin, trades over-the-counter, and is only available to accredited investors. According to stock strategist Tom Lee of Fundstrat, the trust is significantly undervalued and should be trading at three times its current price.
Lee, who was JPMorgan Chase's chief equity strategist from 2007 through 2014, rates GBTC an "attractive buy", targeting a 250% return for the trust. He also strongly recommends buying bitcoin, projecting a price target of $25,000 by 2022. His target is based on bitcoin attaining 5% of the market capitalization of gold, which some see as a very conservative target. Several other analysts are projecting even higher price targets for bitcoin based on a percentage of the market cap of gold and/or reserve fiat currencies, since they see its potential as a store of value, a safe-haven inflation hedge, and a global reserve currency.
If Lee is right, and if the regulatory hurdles mentioned are satisfactorily ironed out, it is likely that several exchange-traded products will arise to meet the exploding demand and will become available to the average investor. When these funds are managed by well-respected and trusted old-school money managers like Lee, an entirely new source of money will begin flowing into the cryptocurrency space.
Total US retirement savings is a $26.6 trillion market. The current market capitalization of bitcoin is roughly $100 billion or about .03% of retirement savings. Imagine the impact a mere 5% of US retirement savings would have on the cryptocurrency markets. Now we're talking market cap in the trillions.
An ETF will open the cryptocurrency door to individual investors who currently find the market too enigmatic, esoteric, weird, or just plain scary to manage on their own. They will no longer have to overcome their fear of managing this strange new futuristic asset that only exists in bits and bytes, because their trusted broker or money manager will be doing it for them.
Cryptocurrency futures contracts listed on a major US exchange would bring in those who are already accustomed to trading highly leveraged derivative contracts that have little tangible existence outside of the computer code. But none of this will compare to the third wave of cash - direct trading operations run by the major Investment banks.
JPMorgan Chase's CEO Jamie Dimon has famously declared that he would fire any trader stupid enough to buy bitcoin (this is despite acknowledging that his daughter owns some). But other financial heavyweights and Wall Street CEOs are either softening their stance on cryptocurrencies or starting to embrace them fully.
Christine Lagarde, director of the International Monetary Fund, has said that it's time to take cryptocurrency seriously and "we are about to see massive disruptions" in the financial sector.
"Major Funds and Important Eyes"
Goldman Sachs, the 150-year-old legacy investment bank, one of Wall Street's most venerated and trusted institutions, is considering a trading desk focused exclusively on trading cryptocurrencies for its clients. According to thestreet.com, "Goldman is known for its deep pockets, so if the bank opens the desk, it could attract major funds and important eyes." Of course as soon as one of the major banks starts a trading operation, the others will be tripping over themselves to follow suit.
No matter which of these scenarios plays out first, there is almost certainly a massive tsunami of cash heading for the cryptocurrency market. Are you ready?