Zacks Investment Ideas feature highlights: Coinbase, MicroStrategy, BlackRock, Marathon Digital and ProShares Bitcoin Strategy ETF
Bitcoin’s Untapped Potential: Institutional Adoption
The revolutionary invention of Bitcoin came from a humble 2008 white paper by a pseudonymous person or people named Satoshi Nakamoto. The idea was simple yet powerful – create a digital, decentralized, secure network resistant to a single point of failure. Through the years, Bitcoin has seen some major tests, including (but not limited to):
The 2008 Financial Crisis
Bitcoin went live slightly after the largest recession in more than 100 years.
Mt. Gox Collapse
Early in Bitcoin’s existence, Mt. Gox was the largest Bitcoin exchange in the world and handled around 70% of Bitcoin transactions. However, in early 2014, Mt. Gox was hacked, and the exchange lost approximately 850,000 Bitcoins belonging to customers, equating to hundreds of millions of dollars.
FTX was one of the largest crypto exchanges in the world, but in 2022, regulators discovered that its founder Sam Bankman Fried, allegedly mishandled customer funds. Soon after, Fried was arrested, and FTX was forced into Chapter 11 bankruptcy.
Bitcoin is known for having ardent haters and religious followers. Nonetheless, despite the shockwaves these and other events sent through the cryptocurrency world, Bitcoin itself has survived. Through thick and thin, Bitcoin has continued to function as a decentralized digital currency, and its price eventually recovered. Since its inception, Bitcoin’s average annual return has been stunning – 230% annually (well above the S&P 500 and pretty much every asset). Bitcoin is now worth $510 billion – well above most Fortune 500 companies.
Institutional Adoption: A Major Catalyst that Hasn’t Come to Fruition (Yet)
If you missed the meteoric Bitcoin returns, is the juice still worth the squeeze? The answer is yes. Bitcoin has achieved stunning returns without major institutional investors being involved. Below are 3 catalysts that will send Bitcoin and Bitcoin proxies even higher:
The US Securities and Exchange Commission (SEC) is locked in major lawsuits against crypto players. Recently, XRP altcoin parent Ripple scored a historic court win over the SEC. The court ruled that XRP is not an offer of unregistered securities. That’s potentially good news for Coinbase, the largest US crypto exchange that is currently entangled in a similar lawsuit with the SEC.
New Accounting Standards
Recently, the Financial Accounting Standards Board (FASB) changed corporate accounting rules – a move that will help crypto-centric companies like MicroStrategy. MSTR, one of the largest Bitcoin holders, can now alleviate undesired perceptions associated with holding Bitcoin. Furthermore, the new standards will allow banks to take custody and lend against Bitcoin – a significant win for the industry.
Spot ETF Approval
Currently, no spot Bitcoin ETF exists in the United States. As the name implies, a spot ETF is a mechanism to invest in Bitcoin “on the spot.” The ProShares Bitcoin Strategy ETF,a non-spot Bitcoin ETF, is underperforming Bitcoin itself dramatically year-to-date.
However, BlackRock, the largest asset manager in the world, has applied for a spot Bitcoin ETF, along with others. With that in mind, the possibility of a spot Bitcoin ETF seems inevitable (out of more than 500 applications, BLK has only had one rejected in its history).
Slowly, Then All at Once
After years of failures, the Bitcoin and crypto industry is inching closer to regulatory clarity due to recent court victories, new accounting standards, and the potential for a spot Bitcoin ETF approval. Regulatory clarity will clear the way for institutional adoption. If institutional adoption is to take place, clear winners would be Bitcoin itself, Bitcoin proxies such as Marathon Digital and Coinbase, which will benefit from increased trading from institutions and custody of Bitcoin ETFs.