Why institutions are still hesitant about Bitcoin

Why institutions are still hesitant about Bitcoin

By P.M. Dizon | Nerd Lawyer | 26 Jul 2021


Many in cryptocurrency wonder why up to now, many institutions are not buying Bitcoin or its derivatives. There are now a number of large companies holding Bitcoin as an asset. This includes 36 public companies worldwide. El Salvador had made Bitcoin its legal currency. Many companies now accept payments in Bitcoin. Moreover, returns on Bitcoin in one year have been up 230%.

So why not? The answer most people would give is "volatility." But that answer is incomplete.

What makes Bitcoin so volatile are the WHALES. Allow me to explain with some Bitcoin history.

When Bitcoin started out, it was worthless. But more people  mined it, traded with it, gambled with it, or used it for gaming, and people started having more of it. When people started putting value into it, those who had it either sold their Bitcoin, causing some of its first crashes in value,  and others bought the dip. This went on for a while. But when Bitcoin's value was around US$10, speculation began in earnest, and Bitcoin HODLing became a thing. So now, people started hoarding Bitcoin instead of using it as currency to trade for good, and this pushed the price up. These speculators who started buying up Bitcoin came to be known as whales. And every so often, whales would sell at at certain points and cause a panic, crashing the market.

The Bitcoin whales are so significant in the cryptocurrency ecosystem that we have whale trackers and wallet-to-exchange trackers.

This level of volatility is so large that the SEC of the United States has refused to issue approval of Bitcoin ETFs. The SEC is now headed by Gary Gensler, a professor who taught courses in cryptocurrency in the Massachusetts Institute of Technology (MIT), and has studied Bitcoin better than most people in the cryptocurrency industry have. With him at the helm of the SEC, the industry thought it was just a matter of time until a Bitcoin ETF is approved. But to this date, many decisions on ETF applications have been postponed. It is obvious that the SEC under Gensler has major concerns about how companies and securities can be affected by a Bitcoin ETF. This concern is not based on the security or value of Bitcoin, but due to the unreasonable volatility.

People in the cryptocurrency industry claim that the tradeoff for such high returns on investment is volatility. But what most do not like to say is that the volatility of the cryptocurrency market can be unreasonable because of the inequitable distribution of Bitcoin holdings. There is nothing wrong with volatility in market. But there is a big difference between reasonable volatility and unreasonable volatility.

Volatility is reasonable if market movement happens due to something reasonably explainable, like how announcing an increase of interest rates or inflation could cause a market crash. Even a crash caused by social media frenzy is reasonable because one can see it coming. It doesn't blindside you. There are indicators if you keep your ears on the ground. But if the volatility happens simply Elon Musk tweets something, then that is unreasonable. If it happens because one person needed to buy a house, so he sold 3,000 Bitcoins on an exchange, causing a significant dip in price and panic selloff in an exchange, then that isn't reasonable.  When just one ancient 8-year old wallet moves, and the entire cryptocurrency market shudders, that's not reasonable.

It is a startling reality that a few people with large Bitcoin holdings can decide to move in concert in a centralized exchange to cause a market crash, profit from it, and then buy the same amount of Bitcoins they sold during the dip and in the resulting confusion, and then wait for the market to go up again after having made millions but not losing any assets at all. This is the reality of the cryptocurrency ecosystem. If whales move, the smaller fish get caught in the waves, but the whales never get hurt.

And this is an important consideration for institutional acceptance. Institutions would need to justify to their investors why they would purchase Bitcoin or its derivatives in face of the reality that the whim of a single person can cause a large shift in the value of their assets, or destroy them altogether.

 

What can be changed?

 

The most important change that would  significantly bring in institutional investment is equitable distribution of ownership of Bitcoin. 

This means that whales should start selling their holdings (hopefully gradually) without waiting for Bitcoin to reach US$100,000 in value (as many seem to be waiting for). The increase in supply will lower the value of Bitcoin temporarily, but it will also allow more people it to purchase at reasonable rates. If whales lessen their holdings to the point that more people and institutions can purchase Bitcoin for themselves and reduce the power of the whales to tank the market, it makes the entire cryptocurrency market more stable and less sensitive to whale movements.

It is human nature for whales to feel that they are losing out on the gains. But those gains won't be come without institutional buy-in. And most institutions won't buy if the value of Bitcoin is dependent on people who are just waiting to dump it once it reaches US$100,000 a coin. It might even be more beneficial for them to purchase altcoin projects that can increase the utility of Bitcoin - like the RUNE token of ThorChain, for example. This would increase the value of the entire cryptocurrency industry and increase the value of their own investment. 

This may seem an unrealistic proposal. But this is actually an exercise in gaming theory. It's a Byzantine Generals problem all over. If everyone did it, then they all benefit. But can you trust everyone to do it?

Perhaps Satoshi, if he is still alive, can resolve this problem the way he resolved it in creating Bitcoin. 

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P.M. Dizon
P.M. Dizon

I'm a lawyer. I love tech and finance. It makes sense to write about these topics especially in a world where law, policy, and regulation lag behind technological advancements.


Nerd Lawyer
Nerd Lawyer

I look at legal and policy issues and developments in the tech space.

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