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From the time the Federal Reserve realized it had a steep inflation issue it had to deal with, it was apparent it would have to start raising interest rates to get it better under control, and to bring it back to its target level of approximately two percent.
When the market realized this was going to have a negative impact on future cash flows, especially of high-growth tech companies, investors started selling off these types of stocks and asset classes in order to mitigate risk.
Since so many institutional investors had taken positions in Bitcoin (BTC-USD), when the sell-off began, they lumped Bitcoin with high-growth tech stocks, which has brought about a period of correlation between the two, which is the key catalyst that has driven the price of Bitcoin and other cryptocurrencies down.
In this article we’ll look at why, over the long term, this isn’t going to continue on, primarily because of the ongoing growth and interest in Bitcoin from countries, states, and venture capitalists.
Global crypto adoption remains strong
There are several factors behind growing global Bitcoin and crypto adoption, including store of value, increasing demand from investors, institutional acceptance of it as an asset class, decentralization, superior control by users, and providing solutions to the unbanked in lower middle-income countries, among a number of other benefits.
It is my opinion that adoption rates of Bitcoin are probably the most important thing to consider when looking at the potential growth trajectory of Bitcoin going forward.
Estimates as to how many Bitcoin owners there are stands at approximately 106 million.
While the drop in price of Bitcoin in 2022 has resulted in slower growth, it still remains far above what it was before the bull market of 2020.
Countries and States
Concerning lower middle-income countries, Central African Republic (“CAR”) recently joined El Salvador as the second nation to make Bitcoin legal tender. I don’t this as a start of an avalanche of countries doing the same, but they’re not the last countries that will take these steps. Also, as the recession worsens and the value of many currencies continue to plunge, Bitcoin is going to be an attractive alternative to fiat currencies. All that will add to an increase in the adoption rate of Bitcoin.
Earlier in the year, one of the countries to embrace Bitcoin was Panama, which passed a law allowing citizens to use Bitcoin to pay for goods and services. This is not the same as El Salvador and CAR, because it has legalized Bitcoin, but not declared it ‘legal tender’. The major difference is in Panama it’s voluntary for all parties wanting to get involved in the process. Along with Bitcoin, other cryptocurrencies legally allowed to engage in transactions in Panama are Algorand (ALGO-USD), Elrond (EGLD-USD), Ethereum (ETH-USD), IOTA (MIOTA-USD), Litecoin (LTC-USD), Stellar (XLM-USD), Xinfin Network (XDC-USD), and Ripple (XRP-USD).
One of the more recent countries to adopt Bitcoin and other cryptocurrencies as a payment option is Bahrain, which has teamed up with EazyPay to empower customers to use crypto at over 5,000 point-of-sale (“POS”) locations. Over 70 cryptocurrencies will be able to be used to make transactions, although I believe Bitcoin will be the most used of the cryptos offered, which will further boost adoption.
Again, I believe we’re going to see many similar actions taken in a growing number of countries.
In the U.S., Colorado announced it would accept Bitcoin as payment for taxes, becoming the first state to do so. Businesses aren’t included in the decision.
Since the transactions will be processes through the “PayPal Cryptocurrencies Hub,” residents of Colorado will also have the option of using Ethereum, Bitcoin Cash (BCH-USD) or Litecoin to pay their taxes.
Taken together, it provides ample evidence to reinforce the fact that the adoption of Bitcoin is only going to grow, and once the Federal Reserve and other central banks around the world stop raising interest rates to battle inflation, the combination of increased adoption and a return to bullish sentiment will propel the price of Bitcoin much higher.
Large institutions
Large institutions have played a big part in increasing the adoption of Bitcoin, as they have bought large amounts of the flagship crypto. At the same time, these institutions, because they treat Bitcoin in the same way they treat high-growth stocks, have been a major part of the reason Bitcoin has taken the big plunge in price because they’ve been selling their holdings off, i.e., they’re not HODLers.
That said, there is still a lot of long-term demand for Bitcoin, and when the price rebounds they’re positioning themselves for the next big upward move. In response to that, companies like BlackRock and Societe Generale, along with Nasdaq, are providing or launching services targeting big institutions.
In August 2022 BlackRock took a couple of steps to provide its large institutional clients services that provide them opportunities to take a position in Bitcoin.
In early August it entered into a deal with Coinbase, via Coinbase Prime and BlackRock’s Aladdin – its investment management platform – to provide its customers direct access to acquire Bitcoin. Other services offered through Aladdin are “crypto custody, prime brokerage, and reporting capabilities.”
The company noted that its institutional clients are increasingly interested in the asset class, presumably because Bitcoin’s current price offers a good entry point.
In August, BlackRock also announced it had launched, for the first time, a private trust that offers direct exposure to Bitcoin. It also targets BlackRock’s institutional base. The trust is designed to track the price movement of Bitcoin.
Based upon increased demand and interest from its client base, Societe Generale recently launched new services targeting its asset manager clients that are seeking to build funds based upon crypto. One French asset manager named Arquant Capital SAS is using the service to launch funds beginning with derivative products focusing on Bitcoin and Ethereum.
Nasdaq launched a new unit in September called Nasdaq Digital Assets, led by Ira Aurerback, for the purpose of providing Bitcoin and Ethereum custody services for its institutional clients. The new service is currently pending regulatory approval.
All of these services and products being offered are from increased interest and demand from institutional investors. This points to the fact, even while Bitcoin in particular has been getting pummeled, the demand is there from major clients to have services available will make it easy and efficient to take positions in Bitcoin when challenging economic conditions start to improve.
This reinforces the fact there will be a lot more adoption of Bitcoin in the years ahead.
Venture capital
Citing the H1 2022 Crypto Fundraising Report, FinSMEs said venture capital firms poured over $30 billion into cryptocurrency projects in the first half of 2022, already surpassing the $30 billion invested for all of 2021.
On average, it appears raises are getting larger. For example, in 2021, Circle raised $400 million; BlockFi, $350 million; Solana Labs, $314 million; and Dapper Labs, $305 million. Those have increased with some of the larger raises of 2022.
Included in the first half of 2022 was the $4.5 billion raised by a16z, bringing its total funds raised for crypto to $7.6 billion.
Venture capital firm Northzone also recently announced it has raised $1 billion via its latest funding round, with the bulk of that to be used for crypto and fintech startups.
The reason for all of this in my opinion is venture capitalists and large money management companies see Bitcoin and crypto in general are headed for mass adoption, and they’re positioning themselves ahead of the curve to ride the wave of momentum that is coming.
Conclusion
Even though Bitcoin has temporarily fallen out of favor because of the decision by the Federal Reserve to raise interest rates in order to combat inflation, this isn’t going to last. Bitcoin represents an asset class that is going to change things beyond what we can see at this time.
As for the near term, we’re probably going to have much more clarity by the end of 2022 when we know how rising interest rates are having an impact on inflation. When we have two to three months of dropping inflation, it’ll be a signal to the market that the Fed will ease up, which should trigger a change in sentiment among investors. That in turn should bring a lot more money into Bitcoin, driving up the price.
Even if it takes a little longer for several consecutive months of inflation reversing direction, the result is going to be the same: Bitcoin, because of increasing adoption, is going to rebound return to its upward growth trajectory concerning its price.
The Bitcoin story is still in its early stages of adoption, with the best years are ahead of it. Those that are patient and continue to HODL are going to be significantly rewarded in the years ahead.
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