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Bitcoin will reach $1 million due to this little-known phenomenon
Day after day, BitcoinThe unique characteristics of (CRYPTO: BTC), which set it apart from any other asset in the world, are increasingly recognized and understood by investors. The recent approval of spot Bitcoin exchange-traded funds (ETFs) will amplify this understanding, as these ETFs simplify the process for investors to gain exposure to Bitcoin.
Although the approval of spot Bitcoin ETFs has been widely celebrated as an unofficial seal of legitimacy, signaling that Bitcoin is here to stay, there is another crucial dimension to consider. Once this is fully understood, it will become clear that Bitcoin has the potential to reach the coveted $1 million price tag.
Image source: Getty Images.
Understanding the current landscape
The approval of spot Bitcoin ETFs revolutionizes how the average investor, or retail investor, can add Bitcoin exposure to their portfolios. By simply purchasing shares of one of these ETFs through their brokerage, investors can now bypass the complexities of navigating cryptocurrency exchanges and managing digital portfolios.
This development has the potential to significantly increase demand for the limited and dwindling supply of Bitcoin. However, as transformative as this increased access is for retail investors, it will pale in comparison to the tidal wave of demand expected from institutional investors entering the market.
Before diving into the numbers, it’s essential to understand who the institutional investors are. For a long time, I heard Bitcoin enthusiasts say that institutions were coming, but I never really understood what that meant. Institutional investors are organizations that invest money on behalf of their clients. These include pension funds, pension schemes, sovereign wealth funds and hedge funds. Essentially, they manage and invest huge amounts of money.
Prior to the approval of spot Bitcoin ETFs, institutions were either prohibited from entering or reluctant to enter the Bitcoin market due to the complexity associated with owning digital assets. However, with the advent of these ETFs, institutions can now easily integrate Bitcoin into their large portfolios, opening the door for a large influx of institutional capital into the Bitcoin market.
It’s time to do some numbers
But what will be the impact of these institutions? As of May 15, approximately 700 professional investment firms were estimated to hold approximately $5 billion worth of these spot Bitcoin ETFs. Leading the way is Millennium Management, an investment firm that manages more than $64 billion, including $1.8 billion tied to Bitcoin ETFs, or about 3% of its total portfolio. But the list is long and includes people like Morgan Stanley (the sixth largest bank in the United States), Bracebridge Capital (a hedge fund that manages Yale and Princeton investments), and even the State of Wisconsin Investment Board.
The story continues
However, as it stands, retail investors are the primary owners of spot Bitcoin ETFs. Reports suggest that around 10% of all ETF-related assets come from institutions. But that number is growing and will continue to grow.
The influx of institutions into the Bitcoin market will likely be gradual, as they typically engage in extensive due diligence before making allocations. Unlike retail investors, who can enter the market quickly by purchasing shares of an ETF, institutions often take the time to study the impact of Bitcoin on their portfolios before making small allocations.
Yet after conducting their research, I think they will likely all come to the same conclusion: Bitcoin’s inherent characteristics make it a necessity in wallets. Eventually, widespread adoption among institutional investors will occur, leading to a tsunami of capital flowing in.
It’s unclear exactly how much money, but based on recent studies claiming that a 5% allocation is the ideal amount of exposure, we can begin to estimate the potential impact of institutional investors. With 5% of the $129 trillion in assets they manage, Bitcoin’s market capitalization could climb to over $7 trillion and its price beyond $400,000.
However, some analysts believe a 5% allocation might be too conservative. Most notably, a recent study from ARK Invest suggests that the ideal exposure level should be closer to 19%. If this were to happen, the price of Bitcoin could rise above $1.3 million.
The little-known theory that comes into play
What we are witnessing marks the beginning of a fascinating phenomenon: game theory. Essentially, game theory suggests that rational actors, in this case institutional investors, will strategically act in their best interests based on the actions of others.
As institutions watch their peers reap the rewards of Bitcoin investments, they will inevitably face pressure to join the fray or risk being left behind in the race for returns. This dynamic, driven by the desire to outperform peers and achieve maximum returns, will likely fuel a surge in Bitcoin adoption and investment like we have never seen before.
Although retail investors have played a significant role in Bitcoin’s journey thus far and will remain an important cohort, the entry of institutions represents a paradigm shift. The scale and resources at their disposal will not only amplify the dynamics of the Bitcoin market, but also inject a new level of competition and urgency. As institutions vie for supremacy and seek to capitalize on Bitcoin’s potential, the game is set to evolve in unforeseen ways and propel Bitcoin to new heights.
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RJ Fulton has positions in Bitcoin. The Motley Fool posts and recommends Bitcoin. The Motley Fool has a disclosure policy.
Prediction: Bitcoin will hit $1 million due to this little-known phenomenon was originally published by The Motley Fool