Bitcoin Has Become Attractive for Institutional Investors, Could Become the No.1 International Trade Currency in the Future - Citi

Bitcoin is at a “tipping point” now and could potentially become the preferred currency for international trade, Kathleen Boyle, a managing director at Citi GPS, wrote in a research note the bank sent to clients.

“Our expert interviewees saw 2020 as a tipping point for mainstream institutional investors entering digital currencies markets, with Bitcoin leading the way. A number of metrics are often cited as important proof points for this transition. First, as discussed in Section II, open interest in CME’s Bitcoin futures, often considered a benchmark of institutional activity due to the fact that futures provide exposure to Bitcoin without having to hold it directly and in large trade sizes, had surged by over +250% between October 2020 and January 2021,” Citi analysts write in a research note.

Bitcoin has managed to win over institutional investors after it initially had attracted mostly retail investors for its underlying technology and social value proposition. Bitcoin has also managed to penetrate into businesses with 36% of US small-and-medium enterprises (SMEs) accepting BTC in 2020.

“The intersection of low yields and inflationary expectations has increasingly fostered the institutional investor view that Bitcoin could represent an inflation hedge, a portfolio diversifier, and a safe haven not currently offered by traditional government bonds all at once.”

The mass crypto adoption is likely to receive a major boost from central banks as well, with the latest study of 60 central banks by the Bank of International Settlements found that 86% indicated they were engaged in some work on Central Bank Digital Currencies (CBDCs).

“If these efforts progress to the actual issuance of central bank-backed digital currency, blockchain would become a mainstream offering. Individuals and businesses would have digital wallets holding a variety of cryptocurrencies, stablecoins, and CBDCs just like they today have checking, savings, and treasury accounts. Connectivity between the traditional fiat currency economy, public cryptocurrency networks, and private stablecoin communities would become fully enabled.

“Bitcoin may be optimally positioned to become the preferred currency for global trade. It is immune from both fiscal and monetary policy, avoids the need for cross-border foreign exchange (FX) transactions, enables near instantaneous payments, and eliminates concerns about defaults or cancellations as the coins must be in the payer’s wallet before the transaction is initiated,” it is further said in a note.

Going forward, investors will focus on two aspects of Bitcoin. The first is its resistance to censorship with Citi saying “it might prove to be almost impossible for a government to shut down access to Bitcoin.”

Secondly, Bitcoin’s ability to act as a store of value will continue to attract new supporters. The “digital gold” thesis is only going to get louder and louder, Citi says.

“The supply of both is seen as finite, though the amount of gold still existing in the earth is unknown whereas the amount of un-mined Bitcoin can be precisely calculated. Gold can be divided into ever smaller amounts, from ounces to half ounces, quarter ounces, grams etc. Bitcoin can be divided into Satoshi units equating to 100 millionth of one Bitcoin.

Moreover, BTC should be seen as a “North Star” as it guides altcoins.

“Gains in the value of Bitcoin in turn are drawing attention to and encouraging adoption of other digital currencies and highlighting the experimentation with entirely new business models taking place in the on-chain domain. In this sense, Bitcoin is acting as the North Star to the emerging world of crypto commerce, helping to illuminate the financial industry’s path.

“Whereas the Bitcoin protocol has largely enabled creation of Bitcoins, the Ethereum is premised on the development of 'smart contracts'. These contracts are templates that can be programmed to provide any number of products or services based on a coded set of predefined rules and conditions.”

The maturation of the market structure and increased regulation and scrutiny are key to unlocking more institutional inflows. Citi analysts also take note of the current bull run in Bitcoin, which is mostly underpinned by institutional investors and not retail, as that was the case in 2017.

“For institutional investors to participate in a new asset class, it must be underpinned by a robust infrastructure able to support an efficient market. Hallmarks of that structure are its ability to deliver the benefits of market data integrity, efficient price discovery, liquidity and depth, capital efficiencies, and asset safekeeping.”

There is also more certainty in the crypto market today than three years ago.

“Over the past two to three years as regulators across the world have become well-informed on crypto-assets and their nuances, they have increasingly issued guidance and/or established regulatory regimes to help guide established and emerging firms on how to engage in this emerging landscape. While this is happening at a different pace across jurisdictions, it is nevertheless a positive step towards their integration into the financial system,” analysts wrote.

The research concludes with a remark that Bitcoin’s journey has clearly entered a new stage and it is at “a tipping point of its existence and the path forward from here may have broad and widening repercussions.”

Bitcoin price trades 6.5% higher at the moment near the $48,100 mark.

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