2020: The year bitcoin went institutional

On December 11, a prominent but very private financial newsletter author noted to clients that while he had never previously written about bitcoin, it was correct to say that institutional capital had now started to arrive in scale and that it would be churlish to pick a fight with it. Demand for bitcoin would now outstrip supply.

Bitcoin, he observed, would become an excellent metaphor for risk appetite in 2021 as a result.

Less than a week later, Coindesk confirmed that UK-based asset manager Ruffer had accumulated some £550m of bitcoin since November, representing some 2.7 per cent of the firm’s AUM.

Ruffer’s move is now being widely interpreted as the beginning of a major portfolio diversification trend into bitcoin. It seems institutional money can no longer afford to ignore it. And bitcoiners are understandably overjoyed.

Price moves since certainly could be indicating some sort of pragmatic acceptance of bitcoin in investment circles:

So have these institutions gone mad? Or are things genuinely different now?

If they are, we think it all comes down to four key factors.

1. Bitcoin’s asset class status

Whether critics like it or not, bitcoin’s status as an asset class is now much harder to dispute. Yes, the cryptocurrency remains relatively useless as a medium of exchange outside of the dark markets. But it’s no longer clear whether that really matters. Bitcoin’s value has instead become linked to something more profound: its incapacity to go to zero despite having no central point of support or guarantor.

This, we would argue, is a function of two key elements: a) too much vested capital in the system to actually let it go to zero and b) enough shorts in the system to ensure short-covering at zero would inevitably be supportive.

But it is also a function of another important phenomenon: the emergence of a competing tax authority to that of the state in the shape of the hacker.

This is important because the longstanding economic argument against bitcoin as an effective store of value has always been that fiat money is ultimately stabilised by the state’s capacity to demand taxes in its own currency. As was noted by Dealbook in 2013, “money is inevitably a tool of the state” and “no private power can raise taxes or pass laws to unwind monetary excesses”.

In 2020, however, that doesn’t seem quite right. Private “hackers” routinely raise revenue from stealing private information and then demanding cryptocurrency in return. The process is known as a ransom attack. It might not be legal. It might even be classified as extortion or theft. But to the mindset of those who oppose “big government” or claim that “tax is theft”, it doesn’t appear all that different.

A more important consideration is which of these entities — the hacker or a government — is more effective at enforcing their form of “tax collection” upon the system. The…