The price of bitcoin raced from $5,000 to $8,000 in the last month, evidence of a possible cryptocurrency revival. This time, demand may be fueled by an institutional embrace of crypto, rather than the retail investment mania of 2017.
Perhaps the clearest sign of bitcoin’s institutional adoption is the growth of indirect investment. For instance, the Grayscale Bitcoin Trust—a fund which allows accredited investors to invest in bitcoin—recently reached a 10-month high, with approximately $1.4 billion in assets under management. Grayscale’s GBTC product means institutional investors can buy bitcoin within the bounds of conventional finance (i.e., the fund is available through brokerage accounts and provides regularly audited financial statements). Retail investors can also purchase shares in the fund, but often pay a premium, in excess of 30%.
Trading experts on the sidelines of Consensus—a cryptocurrency industry conference in New York this week—also pointed to an additional reason for bitcoin’s resurgence: The New York attorney general hasn’t sunk Bitfinex, one of the largest crypto exchanges.
Many traders bet that bitcoin would tank after the AG, Letitia James, revealed her office’s investigation of Bitfinex’s parent company, iFinex. The firm quietly shifted hundreds of millions of dollars to Bitfinex from an affiliate, and James’s office suspects the company may have defrauded investors. But the ramifications of the legal process—if any—have been slow to develop. In the meantime, Bitfinex raised $1 billion (in just 10 days) through an initial exchange offering (IEO), a minor twist on the initial coin offering (ICO) phenomenon that swept blockchain enthusiasts two years ago.
Betting against bitcoin was popular, at least a few weeks ago. It was a “crowded short,” explained Dave Weisberger, CEO of CoinRoutes, an order-routing service for cryptocurrency trading. But when the market didn’t dive as expected, traders with short positions rushed to cover themselves, buying indiscriminately in bitcoin’s spot market. “Short covering is often price insensitive,” remarked Weisberger.
As the short sellers bought up bitcoin, it helped send the coin soaring. The theory explains the price bump, and it also suggests the recent surge may not be long lived.