Elon Musk debate: Why bitcoin, why now?
With the price of Bitcoin surging due to an endorsement from entrepreneur Elon Musk, industry expert Stephen Kelso of ITI Capital discusses the rise of cryptocurrency and its attraction for investors
As an emerging markets-focused multi-asset prime broker, ITI Capital provides access to over 100 markets around the world. Emerging markets are characterised by less efficient capital flows and we enable access for our clients and counterparties to these markets.
ITI observes that digital assets, and Bitcoin in particular, are an extension of the emerging markets investment phenomenon. Simply put, they make more difference to more people’s lives in emerging markets.
At the individual level, they offer democratization of financial services and access for all to basic services and investments taken for granted in developed markets. For the corporate CFO, it provides flexibility for funding.
Bitcoin is a manifestation of the internet.
Bitcoin is a powerful ‘scarcity asset’ to protect from the debasement of fiat currencies by the world’s central banks.
The monetary policies of the Federal Reserve (Fed), European Central Bank (ECB), Bank of England and Bank of Japan are the largest forces in capital markets. The response to the Great Corona Recession has played out at a much-accelerated rate to that following the Great Financial Crisis (GFC) from 2008.
The quantum of stimulus is now ‘trillions’ not ‘billions’.
Developed markets are now experiencing the debasement of currencies hitherto the domain of emerging and frontier markets. There were more extra US Dollars (USD) printed in the first three quarters of 2020 than were in total circulation in 2014-2015. This debasement of currencies is driving the meteoric asset-price inflation seen across asset classes including equities, commodities and fixed income – where 28% of the world’s bonds now trade with negative yield.
Gold, silver, platinum, palladium and other precious metals have all moved sharply higher as investors flock to these traditional stores of value. Bitcoin is arguably the ultimate store of value because it has a finite 21 million total supply.
Unlike precious metals, where advances in recovery and refining technologies can further supply, Bitcoin supply is absolutely constrained.
ITI believes that in many ways, Bitcoin is ‘better at being gold than gold’ because the cost of carry is substantially less, it is physically much more straightforward to access without the intermediation of administrators or facilitators and it doesn’t require to visit a vault. It has certainly been a volatile store of value – and so too have most nascent asset classes.
Many of today’s technology titans saw around 90%+ drawdowns following the Dotcom crash. Why now? ITI observes that compensation drives behaviour.
One of the biggest differences now to January 2018 when Bitcoin was last near these levels is that the incentivisation for professional asset managers, allocators and wealth managers is very different.
Now, second time around, the pendulum has swung fully to the point where fiduciary responsibility requires that professionals point their clients to the safest and most efficient ways to access Bitcoin.
After the GFC, when rates went to zero and bonds alone no longer sufficed to meet the liabilities of pension funds, insurance companies and other asset managers, ‘multi-asset investing’ became the industry standard as investors were forced up the risk curve into other assets.
The pinnacle of multi-asset investing has long been regarded as the US endowments, led by Yale’s David Swenson who pioneered the application of Modern Portfolio Theory (MPT). MPT is the appliance of the science of diversification.
The US endowments invested in Bitcoin over two years ago because it was unleveraged and had a low correlation to other asset classes.
oday, other multi-asset investors are adopting Bitcoin more quickly because of the rapid debasement of the USD and the need to protect against the return of inflation with increasingly negative real interest rates.
ITI observes that the inflation reality of very few people is reflected in the published Consumer Price Index (CPI) figures.
Again, this is a phenomenon where experience in emerging markets has led the developed markets in recent times. Whether the housewife or the corporate CFO, the real things that need to be bought are not appreciating at 1%-3% per annum. Treasury bonds alone have rallied c.23% in 2020.
ITI believes that Bitcoin is a potent long-duration reserve asset. Bitcoin is the only major asset that has outperformed the balance-sheet expansion of the Fed et co over any meaningful period. That is why now corporate CEOs and CFOs are investing in Bitcoin.
ITI believes that BTCE is the best way for equity and multi-asset investors to access Bitcoin. It is the world’s first centrally cleared exchange traded product (ETP) on Bitcoin.
This means it can be bought, cleared, held and traded like a regular equity. For instance, BTCE is the fastest growing ETP in the history of Deutsche Borse, where it trades on the main Xetra exchange.
BTCE is not a private-placement instrument and more importantly, it trades tightly (within basis-points) to the net asset value (NAV) of the underlying constituent, Bitcoin.
This is imperative as the fiduciary responsibilities of professional allocators and investment governance committees require that clients do not pay unnecessary fees or spreads. Investors need to be aware of any risks this may carry and take steps to avoid potential implications.
How ITI can help you invest in Bitcoin?
ITI is an Authorised Participant of BTCE and can provide block-trading access to equity clients via the liquidity of the underlying Bitcoin market. (Like all ETF and ETP products, the relevant liquidity to consider is that of the underlying constituents).
ITI also provides financing on Bitcoin from its FCA-regulated prime broker, ITI Capital, and enables access to Structured Products on BTCE.
Now is the time for Bitcoin holders to bridge their digital assets into the equity-financing world, get access to the traditional financial markets and banking partners, and gain that much-needed competitive edge in today’s fast-evolving investment landscape.
Stephen Kelso is head of markets at ITI Capital
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