Low Percentages of Allocations to Bitcoin from Corporations May be “Relevant” in A Relatively Illiquid Crypto Market, Coinrule Argues

The team at Coinrule, a cryptocurrency trading startup that recently secured over £410,000 in funding through its Seedrs round, notes in a blog post published by crypto futures and options exchange Deribit that Investors now have a new option they can add to their investment portfolios.

According to Coinrule and many other crypto industry professionals, Bitcoin (BTC) has finally “achieved the status of a new asset class, disrupting the way many traditional investors conceive of the financial markets as we know them.”

Coinrule points out that back in 2016 and 2017, Bitcoin’s “parabolic” price surge was mainly driven by speculative retail investors. This year, however, it appears like it’s the institutional interest that’s beginning to really take over. Although retail investors seem cautious in purchasing cryptos as the memories of losses they saw back in 2018/2019 might still be quite “vivid,” institutional investors “employ sound risk management processes to protect themselves from drawdowns,” Coinrule claims.

They added that “even low percentages of allocations from corporations are relevant in a market that is still relatively young and illiquid compared to equities, bonds, and commodities.” They also argued that as “more and more corporations publicly announced to be adding Bitcoin to their reserve treasuries, it will be tough to put the genie back into the bottle.”

According to Coinrule, retail investors tend to base their investment decisions and judgments mostly on “sentiment, price action, and news.” Meanwhile, institutional investors’ decision-making processes are usually “more complex and done on advanced models, which often consider the correlations between the assets included in a portfolio,” Coinrule explained. They added that risk-management is “the key to the long-term survival of a professional investment entity.” They believe that the best or optimal way to determine the risk starts by evaluating the relationship that “statistically” links different asset classes.

The Coinrule team explains that portfolio managers aim to lower the overall risk by holding certain assets that may be quite “de-correlated” from each other. Coinrule also mentioned that when different asset classes don’t move in the same direction (upwards or downwards), it “significantly trims the aggregate portfolio volatility because the profits from one asset statistically compensate losses from other assets.”

Coinrule points out that this is actually what happened “for the first time in March 2020, during the Covid-related market crash.” They also noted that “after years of low correlation with other traditional risky assets, Bitcoin sank together with stocks amid a suddenly increased correlation.”

According to Coinrule, the primary driver of the cryptocurrency market crash was “probably the reaction of short-term oriented investors and speculators.” They added that as we can tell from the number of open leveraged positions on digital asset exchange Bitfinex, short-sellers began “adding their exposure at a record pace, while buyers had to close their trades due to sudden margin calls and liquidations.” Coinrule claims that we may assume that “at least part of these short-term traders also invest in stocks and equity derivatives and had to adjust their trading accordingly.”

The Coinrule team further noted that between the months of March and June 2020, Bitcoin, Facebook, Google, and Apple’s price performances “almost overlap perfectly (in relative terms).”

As noted by Coinrule, this was “historic” as it was reportedly the first time ever that Bitcoin (BTC) and other crypto-assets had been impacted by a “broad macro event.” As BTC gradually becomes a new major asset class, there will “always be a sharper overlap in market infrastructure and market participants with traditional markets,” Coinrule predicts.

Coinrule pointed out that the Grayscale Bitcoin Trust has been attracting a considerable amount of funds at really high rates since March 2020, when global awareness about the COVID-19 pandemic had led to one of the biggest financial market crashes in modern history.

As reported, Grayscale’s Bitcoin Trust is holding more than 500,000 BTC and continues to add more each day. The fund mainly focuses on serving institutional and accredited investors who may be willing to pay a premium to Bitcoin’s spot price to add to their investment portfolio a regulated vehicle that offers strategic exposure to the digital asset market.

Coinrule confirms that the GBTC is the largest investment pool in Bitcoin, but there are also other large private organizations that have been accumulating BTC to serve as their primary reserve asset. These entities are most likely not as “price-sensitive as the average crypto investor focused on short-term speculation,” Coinrule claims. They added that these corporations may have decided to invest after a thorough due-diligence process and, “being well aware of the risk involved, they likely adopted risk management tools to mitigate this risk, as it is a common practice for institutional investors.”

Coinrule further noted:

“Investors tend to avoid assets surrounded by uncertainty and prefer those that are more predictable. Ironically, unexpected swings in monetary policies are the main causes of price shocks in currencies. Bitcoin has a mathematically planned monetary policy. What could be more predictable than this?”

They also claim:

“Bitcoin is on track to join the most liquid forex trading pairs thanks to the derivatives infrastructure evolving at remarkable speed. The market is adapting to the needs of far more exigent participants. The days when whales on less transparent exchanges used to manipulate the prices may be about to end.”

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