It has been a difficult year for bitcoin “hodlers” who have had to watch the price of the world’s leading digital currency drop by over 50 percent year-to-date. Here are five reasons to keep the faith
1. The institutional Bitcoin ecosystem is growing
The announcement of Intercontinental Exchange’s intent to launch a digital asset exchange targeted at institutional investors is perhaps the biggest news for cryptographic assets this year.
Intercontinental Exchange (ICE) is the company behind the New York Stock Exchange and its plans include building an exchange that will allow investors to trade futures on digital assets, which will include physical delivery bitcoin futures.
While bitcoin can already be considered as a viable alternative asset class for both retail and institutional investors, the opening up on a new crypto asset exchanged backed by a Wall Street giant is exactly what bitcoin needs to become accepted by the institutional investment community.
Across the pond, Germany’s second largest securities exchange, Börse Stuttgart, has also announced plans to launch a crypto asset exchange. According to FinExtra, Börse Stuttgart is developing an exchange for initial coin offerings, a marketplace for cryptocurrency trading and a safe storage facility for cryptographic assets.
While bitcoin is yet to become a regular feature of institutional portfolios, the barriers to entry for institutional investors adoption are gradually being removed, and with ICE hoping to launch its exchange and custody solution by November, the much talked about institutional ‘pump’ could only be months away.
2. Regulators have accepted that Bitcoin is here to stay
One of the biggest risks to bitcoin over the years has been regulatory risk.and the possibility that governments and financial regulators try to stamp out bitcoin and other altcoins due to their potential to disintermediate established financial institutions.
Even at the beginning of 2018, regulatory risk played a role in bitcoin’s price decline leading up to the G20 meeting in March where global cryptocurrency regulations were discussed.
Fortunately, for crypto asset investors, lawmakers attending the G20 meeting came to the conclusion that cryptocurrencies do not threaten the global financial system and that there will be no global pushback against cryptocurrency innovation.
Moreover, several countries have taken a more positive stance towards cryptocurrencies to attract the booming blockchain industry. Nations such as Belarus, Bermuda, Gibraltar, Malta, and Switzerland, for example, are vying to become major blockchain hubs, while the fourth largest economy in the world, Germany, is now officially accepting bitcoin as a legal payment method.
3. A Bitcoin ETF is coming (sooner or later)
While it is difficult to say with complete certainty that we will witness a publicly-traded Bitcoin ETF, most bitcoin thought leaders and pundits agree that it will only be a matter of time.
Not only is there a stack of new Bitcoin ETFs hitting the SEC’s desk waiting to be approved, but, more importantly, SEC Commissioner Hester Peirce announced that she disagreed with the SEC’s recent decision to reject the Winklevoss Bitcoin ETF and that she believes that the disapproval of the Bitcoin ETF dampens innovation.
“I am concerned that the Commission’s approach undermines investor protection by precluding greater institutionalization of the bitcoin market. More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order,” she stated in a written dissent.
Moreover, with regulated bitcoin futures already approved by the U.S. Commodity Futures Trading Commission (CFTC) and trading on both the CBOE and the CME, it is hard to imagine a scenario where a Bitcoin ETF would be not eventually be approved as one of the two leading U.S. regulators has already given bitcoin its regulatory stamp of approval.
4. Bitcoin is a great portfolio diversifier
According to a study by Yale University, every diversified investment portfolio should hold between one to six percent in bitcoin, depending on the investor's conviction about the future of the digital currency.
The paper’s authors, Yukun Liu and Aleh Tsyvinski, have found that cryptocurrencies, including bitcoin, have no exposure to the influence of common stock market and macroeconomic factors, nor do they correlate with currencies or commodities. Instead, cryptocurrency returns are driven by factors specific to its own market.
Moreover, the cryptocurrencies analyzed in the study, BTC, ETH, and XRP, show a higher Sharpe ratio than stocks or bonds, which means that they have a better risk-return payoff plus the added benefit of being non-correlated to traditional asset classes.
5. Growing demand in emerging markets
Despite the bear market in 2018, bitcoin trading volumes on the largest peer-to-peer exchange, LocalBitcoins, are starting to move towards their 2017 highs in emerging markets.
Countries such as Kenya, Mexico, Nigeria, and the Philippines, for example, have witnessed a boost in trading volumes in the past few months. Moreover, economically struggling nations — whose sovereign currencies have been on a downward spiral — have seen a substantial increase in bitcoin adoption. In Argentina, Venezuela, and Zimbabwe, bitcoin trading volumes have shot up to new highs in 2018.
While most emerging markets buyers tend to be small retail investors and, thus, not as market moving as high net worth individuals or institutional buyers, they nonetheless act as an excellent indicator of global bitcoin adoption trends.
In light of this year’s positive developments for bitcoin, its global acceptance and the growth of its ecosystem, the current Bitcoin price range may provide a good entry point for long-term investors.