Bitcoin's Growing Allure For Institutional Investors: Analyzing The Implications

Well, large institutions are ready to get into the Bitcoin market. Yesterday, Fidelity Investments, Charles Schwab, and Citadel Securities announced they are creating a non-custodial cryptocurrency exchange. Considering the actions the SEC has taken against well-established crypto exchange companies like Coinbase, Kraken, and Binance recently, the timing is a little suspect, to say the least.

I won’t get into conspiracy theories, but it looks like the SEC was trying to put roadblocks in front of the competition. It’s old money versus new money, and old money was looking out for its buddies. As George Carlin said, it’s a big club, and you ain’t in it."

Are large institutions coming into Bitcoin ultimately a good thing or a bad thing for Bitcoin? Well, it depends on what you value. If you are interested in short-term number go up (NGU) in fiat dollar terms, big institutions coming into Bitcoin will surely send the price of Bitcoin galloping higher.

Number Go Up

Companies like Blackrock and Fidelity have trillions of dollars of assets under management. Blackrock was only founded in 1988 yet has a mind-blowing $9 trillion in assets under management.

Fidelity Investments has over $4.3 trillion of assets under management, while Charles Schwab has $7.65 trillion in assets under management. This is REAL money coming into Bitcoin with a tiny market cap of just under $500 million. With these vast entities coming into Bitcoin, it sure looks like the bull market is in full effect.

NGU will attract people who have passively heard about Bitcoin in the financial press. They will see Bitcoin reaching new highs and want to get in on the gainnnnz.

All these new people will buy Bitcoin without UNDERSTANDING Bitcoin, which will lead to prices coming back down. The new buyer who enters the market during the NGU frenzy has not been forged in the crucible of the bear market like seasoned Bitcoin holders.

Did you know the illiquid supply of Bitcoin has passed $15,000,000 coins? Now couple this with Bitcoin that has been lost and locked up in the Lightning Network, and you get a price poised to moon at any moment. When the Bitcoin price launches, faces will be ripped off.

But as a Bitcoiner, do you want people who don’t truly understand the technology entering the market? I’m torn, to be honest; on the one hand, having any kind of exposure is better than nothing, but if they get into it for the wrong reasons, most buyers will get rekted in the end due to a lack of knowledge. I wish the big players would not enter the market just yet. I would like to see the average person deeply understand and buy Bitcoin before the big guns show up.

Institutional Adoption Is Bad For Bitcoin...Right Now

Ultimately the big players getting into Bitcoin at such an early stage is very bad for Bitcoin. Bitcoin adoption is only .54 percent of the global population or roughly 43 million of 8 billion people globally, owns Bitcoin.

Suppose we get large purchases of Bitcoin from these entities and combine this with an illiquid supply. The price will skyrocket in that case, potentially turning off people interested in buying Bitcoin and hurting Bitcoin adoption globally. When you add that most people in the "Global South" use on-chain Bitcoin for daily transactions, we have a recipe for disaster.

Can you imagine Bitcoin trading at $500k or $1 million? New investors will think the price is too high, or they missed the boat and will look for other tokens to invest in.

The goal is to onboard as many people onto the Bitcoin Standard as possible, but this won’t happen if big money throws a wrench into adoption. Unit bias is a well-known phenomenon in the Bitcoin industry. Which is easier to understand? 0.0005 BTC or 500,000 sats?

Most exchanges use BTC to denominate, not sats, and when a new buyer goes to buy Bitcoin on an exchange and sees that $1000 gets them 100 sats, they will balk and buy some shitcoin where they can get millions of coins for $1000.  Shitcoining is precisely what we don’t want to happen!

Rehypothecation Concerns

In addition to massively driving up the price, rehypothecation is a genuine concern of mine. For those that don’t know what rehypothecation is, it is the practice where banks will use assets posted as collateral by their clients and then turn around and use it as collateral for their own use.

Rehypothecation is a practice that is deeply entrenched in banking and investing. We also saw it on full display during the FTX debacle, where 3 Arrows, Celsius, Blockfi, and Genisis all s**t the bed because they used rehypothecated funds to grow rapidly, then crash and burn when the tide rolled out. I fear this practice of reckless risk-taking will become standard operating procedure in the emerging Bitcoin economy.

Now imagine if these massive corporations and their wealthy customer base rehypothecate their Bitcoin holdings many times over, creating more paper Bitcoin than actual true Bitcoin in existence; you get financial chaos all over again.

A deceptive fractional reserve paper Bitcoin system would be created and built on top of Bitcoin. Who do you think will get the blame when ish hits the fan? Not the Blackrock’s and Fidelity’s of the world.

It will be the regular folks like you and me, and the large companies will pressure politicians to tighten regulations on who can own Bitcoin and do away with self-custody. They would get to buy up all the Bitcoin from forced sellers, and we get screwed.  As Bitcoiners, we should not be celebrating the entrance of these large entities into the Bitcoin space at this time.

Bitcoin is peer-to-peer magic internet money, and it should be kept that way for as long as possible.