20 December 2024

Taken from the published LinkedIn pulse article.

Introduction

Last week, BlackRock, the world’s largest asset manager, recommended in a new report that “investors with suitable governance and risk tolerance” should consider allocating as much as 2% of their portfolio to Bitcoin. BlackRock’s sentiment towards Bitcoin reflects the accelerator year that 2024 has been for institutional Bitcoin adoption and corporate allocation.

This is a markedly different institutional landscape from 2023, when institutional engagement was primarily through timid engagement with distributed ledger technology and digital asset use cases outside of the realm of Bitcoin, such as the use of stablecoins for cross-border payments. This shift prompts key questions: Why are major financial institutions considering digital asset allocations, why are they doing this now, and how are they looking to do it?

Why?

In the current phase of market momentum, the most obvious motivation behind institutional treasury allocation to Bitcoin is as an investment instrument, with corporations having taken the view that the asset will appreciate in value over time. This rationale is, of course, not new; MicroStrategy first began to buy Bitcoin in 2020 as part of a buy-and-hold strategy and a conviction in the long-term price growth, and U.S. insurance giant MassMutual invested $100 million in Bitcoin in 2020, it did so to gain “meaningful exposure to a growing economic aspect of our increasingly digital world”. However, digital assets were not largely taken seriously by corporations as a financial instrument prior to 2024.

Another motivation for Bitcoin allocation is as an effective hedge against inflation, albeit this rationale is contentious. Whilst Bitcoin’s supply is fixed, its real-world performance has been inconsistent regarding its correlation to capital markets. Bitcoin’s short existence, traditionally high price volatility, and regulatory uncertainty make it less appealing as an inflationary tool when compared to more traditional hedges.

The speed of settlement and 24/7 trading also means that Bitcoin has proven popular for providing liquidity to corporations and allowing access to their cash quickly and across jurisdictions. The ability to earn a yield on excess cash through capital appreciation of the asset and a desire to diversify reserve assets are also important considerations for corporations looking at Bitcoin allocation.

Why Now?

Whilst the above reasons help explain why companies may allocate Bitcoin in their treasuries, they don’t answer why we are seeing an uptake in this activity now. MicroStrategy, for instance, has more than doubled the size of its Bitcoin reserve in 2024 and has now entered the NASDAQ-100 as a result. In recent weeks, Microsoft and Amazon have seen activist shareholders push for Bitcoin to be added to their balance sheets (albeit unsuccessfully in the case of Microsoft). Since their launch, the spot Bitcoin exchange-traded funds (ETFs) have proven to be one of the most successful ETFs in history.

2024 saw a significant change in institutional engagement with digital assets with the arrival of spot Bitcoin ETFs. The launch of 11 Bitcoin ETFs in January 2024 made it far easier for corporates to gain market exposure to Bitcoin through a familiar trading instrument and without dealing with the complexities of direct digital asset trading and custody. As a result, the ETFs attracted significant investment inflows from mainstream investors who wanted exposure to Bitcoin. With these ETFs driving significant demand, Bitcoin’s price climbed in 2024, drawing considerable attention from financial sectors that had lost interest in the last few years. Bitcoin’s price rise and decrease in volatility further helped improve its perception as a high-margin, credible investment vehicle, with even the U.S. Federal Reserve Chair Jerome Powell acknowledging that Bitcoin shares a certain appeal with gold.

Further, regulatory frameworks in key financial hubs are maturing. Jurisdictions are increasingly conscious of the need to advance regulatory clarity to benefit from the financial rewards of being regarded as digital asset hubs. The 30th of December will see the enactment of the final aspects of the EU's Markets in Crypto-Assets (MiCA) regulation, while the UK’s Financial Conduct Authority published its roadmap for comprehensive digital asset regulation at the end of November. Other key financial hubs, such as Singapore, Japan and the United Arab Emirates, already have frameworks in place. This improved clarity, alongside a growing number of recognised institutional-focused custodians, digital asset-savvy professional service providers, and standardised accounting and tax rules, has helped reduce compliance uncertainty and encouraged more cautious corporate investors to allocate to digital assets. Indeed, since Donald Trump's electoral victory, an anticipated pro-digital asset business environment in the US has been signalled by the replacement of Securities and Exchange Commission Chair Gary Gensler, who was widely perceived as hostile to digital assets, with digital asset-friendly Paul Atkins. Additionally, appointing former PayPal CEO David Sacks as "crypto czar" is expected to boost corporate interest in digital assets such as Bitcoin in the US.

Finally, it is worth noting that adoption and the momentum generated naturally create a snowball effect: as competition intensifies, fear of missing out emerges. As Bitcoin’s price climbs, allocations by early institutional adopters encourage even more companies and investors to follow their lead.

How?

Finally, it is worthwhile noting that once an organisation decides to gain exposure to Bitcoin or digital assets more widely, how they go about it contains a plethora of considerations. At Appold, we are already seeing increased client enquiries on how to hold and handle these assets from a trading and operations perspective.

As noted above, the Bitcoin ETFs have seen significant demand from institutional investors, and corporations must consider whether to hold the digital asset itself or gain exposure from these more familiar Exchange-Traded Products, as this decision causes a large divergence in activity.

For a firm opting to buy the assets directly, considerable work is also required on training staff on asset handling, ensuring robust policies and procedures are in place to avoid unauthorised access or mismanagement, and understanding the technical and regulatory complexities of asset custody, either internally or by seeking out a reputable and robust third-party provider.

Of course, Bitcoin is just one of many digital assets a corporation could allocate to. Indeed, research suggests that stablecoins are currently the most popular digital asset in corporate treasury allocations. Such fiat-pegged assets without the volatility of Bitcoin and many other digital assets can offer a prudent way for corporations to become familiar with the technical infrastructure while gaining the use-case benefits in cross-border payments.

It is also worth noting that we have seen many enquiries from institutional parties interested in the tokenisation of assets. As corporations and whole sectors look deeper into this, holding digital assets themselves will become a more familiar concept to those who are appropriately educated, and more firms will be confident about engaging in this space.

Conclusion

While every investor should do their own research and make decisions based on their own risk perceptions, and many remain deeply sceptical of digital assets, the broad perception of Bitcoin has changed in 2024. It is a reasonable assertion to say that the institutional interest in digital assets we see today would not have seemed feasible this time last year, and this change in perception is an essential step in the development and maturity of the digital asset space.

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