Institutional Adoption and Bitcoin Volatility
Institutional adoption has been forefront to the bullish momentum of Bitcoin for the past year. But could this adoption also lead to increased short-term volatility? Maybe so, and maybe that is what we have seen play out in 2021.
After starting the year on a complete tear, Bitcoin retraced from just under $64K to levels under $30K. Crypto is known for its short-term volatility, but it seemed like the retracement that we experienced was on another level. Institutions can invest much more than the retail investor, which moves the needle both directly (buying up a deflationary asset and driving up scarcity) and indirectly (consumers gain confidence when respected companies invest). However, the deep pockets of institutional adoption may not be all that different from the retail investor.
Some retail investors have strong hands, and some have weak hands. The same can be said of institutions as well. At one end of the spectrum we have Microstrategy, which is the posterchild for strong hands. But I think we are kidding ourselves if we think that all institutions are cut from the same cloth as Michael Saylor. I’m not even going to mention Tesla, as that whole circus deserves its own article. Many institutions are probably on the opposite end of Microstrategy. These companies have CEOs that are not nearly as informed as Saylor, and therefore they are incapable of understanding the fundamental of Bitcoin. If they did, then they would not be selling.
We are perhaps in the most uncertain of financial times as we’ve ever experienced, and many companies are having to make decisions that have significant ramifications for their future. This leads to the point of the article, which is that institutions are taking profits just like every other retail consumer with weak hands. These weak hands could have legit reasons, maybe they’re on the brink of collapse. Maybe the person calling the shots is worried about his job, and the shareholders are skeptical of holding crypto. Whatever the underlying reasons, these deep-pocketed investors move the market in both directions when they jump in and then out.
As these institutions gain more knowledge about the fundamentals of Bitcoin, I believe that these aggressive swings will start to subside. This will lead to a more stable asset. There will likely continue to be short-term volatility for a long time though, and some people cannot look past these market swings. This is because their time preference is all screwed up. Whether it is sticking to a diet, exercise, education, or investing, these people want the “get rich quick” scheme. They are looking for the easy button: they go all in on Dogecoin and then get wrecked. They stick to a “diet” for a day and a half and wonder why they did not lose any weight. Alternatively, those with the strong hands and appropriate time preference will be rewarded. These people endure the short-term sacrifices of exercise and healthy eating because they know the long-term effects are positive. They are not swayed by the volatility over the past few months of Bitcoin, because they know that this thing is going to the moon. When in doubt, scope out.
