Bitcoin Resurgence Leaves Institutional Acceptance Unanswered
(Bloomberg) -- The Bitcoin hype machine is back in overdrive.
The digital token spiked above $13,000 this week for the first time in over a year, touching off Twitter dance parties, new sky-high predictions and even some tattoo flashing. Back are proclamations that crypto is the currency of the future, that the dollar’s days are numbered and blockchain will reorder the financial universe.
A mid-week announcement that PayPal Holdings Inc. will allow transactions in crypto set off the craze, adding about $19 billion to Bitcoin’s value over the following two days. It was the latest in a series of mainstream acknowledgments that digital tokens exist and clients want to trade in them. Wall Street stalwarts like Fidelity Investments have crypto investment products and two public companies -- Square Inc. and MicroStrategy Inc. -- recently said they bought Bitcoin.
But for all the hype, there’s little evidence that Bitcoin and its digital brethren are any closer to displacing fiat currencies. The use case -- what you can actually buy with Bitcoin -- remains flimsy. Instead, some critics argue, digital tokens have simply morphed into another asset class, similar to gold, and the sheen of institutional acceptance is simply proof that financial firms want to get in on the market for trading cryptocurrencies.
“The recent news regarding large corporations investing in BTC is helpful for sentiment and PR, but it is not something that most traditional investors will assign much value to,” said Meltem Demirors, chief strategy officer at CoinShares.
For many bystanders, some of the excitement this week elicited memories of the coin’s record run just a few years back, when super-hype took it to $20,000 and a subsequent crash popped all the champagne bubbles at industry parties within a matter of weeks. Still, some prominent investors have bought in and global central banks are starting to show smidgens of interest.
For a while, predictions of greater acceptance failed to materialize thanks mostly to volatility in crypto prices and reputational blows on the back of hacks and scams.
Analysts say PayPal’s expansion can be seen as a catch-up play to competitors such as Square and Robinhood who already offer similar features. It could also drive engagement and revenue for the company, draw in a wider user base and open up a new way for consumers to use their digital assets, says Darrin Peller, a managing director at Wolfe Research.
But, “other than being used as a speculative currency, one of the biggest roadblocks still is the volatility of the currency and the ability to use it -- the point of sale is tough,” said Peller.
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Data from blockchain researcher Chainalysis Inc. has shown hardly anyone uses Bitcoin for anything beyond speculation. At the start of 2019, only about 1.3% of economic transactions came from merchants, a trend that was little changed over the prior two years.
Some analysts predict that could change via PayPal, though users do face some limitations on the platform. They can’t transfer coins in and out of accounts and can only hold cryptocurrencies that they bought on PayPal. Any crypto coins held in an account can’t be transferred to other accounts, the firm said.
“Despite a lack of real merchant adoption, it was an easy positive PR story for PayPal because it makes them look progressive,” said Tim Swanson, head of market intelligence at Clearmatics. “But the announcement has very little substance since the coins can’t be moved to any outside party.”
To Matthew Edwards, chief executive officer at Dalpha Capital, an investment-management firm specializing in digital assets that’s gearing up to launch its first fund early next year, speculation might be enough of a use case. If institutions can own and trade Bitcoin in a way that adds value to their allocations, then that could be “more than enough reason to play,” he said. But until the trend evolves, “this is simply another asset class to trade.”
Fidelity said it has received interest from a “a wide range of institutional investors, including family offices, RIAs, hedge funds, pensions, foundations, and other institutional investors.” The Boston-based firm declined to be more specific.
Grayscale Investments said recently it raised more than $1 billion for its investment products in the third quarter, a record for the digital-asset management firm. The Bitcoin trust from Grayscale (ticker GBTC) has attracted more than $2.8 billion since December 2017, including $2 billion in 2020. That’s better than about 97% of exchange-traded funds currently listed in the U.S., according to data compiled by James Seyffart at Bloomberg Intelligence.
But PayPal’s announcement and others like it won’t move the needle in terms of investment allocations into digital assets, according to Demirors. CoinShares sees significant interest from traditional multi-asset fund managers, but larger ones are reluctant to be first in the space and say they prefer the safety of the herd, she said. Institutions might start paying more attention should an ETF be approved, for instance.
Regulators have been slower to embrace cryptocurrencies. The U.S. Securities and Exchange Commission has declined to approve a Bitcoin ETF, despite applications repeatedly filed since 2013. PayPal’s announcement won’t nudge them to change their stance, said Naeem Aslam, chief market analyst at Ava Trade.
“These things do not move that fast -- regulators will not allow cryptos to replace fiat currencies,” Aslam said. “If anyone is thinking of that, then they can continue to hope for this for the rest of their lifetime.”
©2020 Bloomberg L.P.