【LongHash Column】Bitcoin price drops 52% from its all-time high, while institutional investors grow by 56%

In 2017, the price of Bitcoin reached its all-time high at $20,093 on BitMex and surpassed $23,000 on cryptocurrency exchanges in South Korea. Despite the current price of Bitcoin at $9,600 being 52% lower than the peak price of $20,093 two and a half years ago, institutional investors have shown a significant increase in investment in BTC.

Grayscale's Positive Sentiment Surrounding Bitcoin Amongst Institutions

Over the past three years, major financial institutions in the United States have maintained a somewhat hostile attitude towards Bitcoin. Particularly, JPMorgan has been critical of Bitcoin for a long time. Over two years ago, JPMorgan's CEO Jamie Dimon even referred to Bitcoin as a fraud.

In recent months, JPMorgan has changed its stance on Bitcoin. A group of analysts from the company stated that Bitcoin has strong momentum and appears more positive.

These analysts said:

"While the collapse of the Bitcoin bubble is as rapid as its expansion, the trading price of Bitcoin rarely falls below its production cost, even during the extreme chaos in March of this year."

Reportedly, the bank has also opened bank accounts for cryptocurrency exchanges Coinbase and Gemini, showing increased support for the crypto industry.

Prominent billionaire investors like Paul Tudor Jones have begun to recognize the potential of Bitcoin as a means to hedge against currency inflation in the long term. Jones disclosed that he allocated 1% of his net assets to BTC.

The maturity of Bitcoin has largely sparked the rise in institutional investors' interest in Bitcoin investment. Jones specifically pointed out that resilience is one of its attractive features.

"I only invested slightly more than 1% of my assets in Bitcoin... every day that that part of Bitcoin survives, I will increase my trust in it." He told CNBC.

The core of Bitcoin is a computing network, a decentralized blockchain network. Over time, the number of blocks will increase, and the computational power—often described as hash rate—will continue to rise, leading to the continuous maturation and expansion of the Bitcoin network.

According to data from Blockchain.com, from June 2019 to June 2020, the hash rate of the Bitcoin network increased from 57 million TH/s to 105 million TH/s within 12 months.

The continuous growth in Bitcoin's hash rate coincided with the third halving of block rewards since the birth of the cryptocurrency. In theory, halving—a mechanism that activates every four years—should result in a significant decrease in the hash rate, as it reduces the amount of Bitcoin miners can mine by half.

Bitcoin's fixed supply limit is set at 21 million BTC. As its supply approaches the maximum limit, miners can mine fewer BTC. Since mining BTC becomes more expensive after halving, Bitcoin's hash rate usually drops immediately after halving.

Although after this halving, Bitcoin's hash rate briefly dropped from 120 million TH/s to 90 million TH/s, the figure returned to over 100 million TH/s within a month.

The flexibility of Bitcoin network's hash rate, the increasing awareness of major financial institutions towards Bitcoin, the rapid influx of institutional funds, and other factors have differentiated the Bitcoin market in 2020 from previous years.

Another bullish indicator for the medium-term trend of Bitcoin, supporting the growing institutional demand for Bitcoin, is the decrease in reserves on cryptocurrency exchanges. This indicates that there are fewer retail investors trading on exchanges.

Researchers at Glassnode stated:

"BTC balances on exchanges have just dropped to a 1-year low of 2,622,984.499 BTC, with the previous yearly low at 2,623,005.552 BTC occurring on June 19, 2020."

If retail trading activity continues to decline throughout 2020, this could lead to an increase in market share for exchanges focused on institutions, bringing about changes in the dynamics of the cryptocurrency market, resulting in price trends and cycles different from those in 2018 and 2019.

However, not all financial institutions believe that Bitcoin will have a bright future in the long term. In a client conference call in May, Goldman Sachs hinted that hedge funds trade cryptocurrencies merely due to their volatility.

In a presentation shared by former investment banker Ethan Vera, Goldman Sachs Wealth Management department stated, "We also believe that while hedge funds may be attracted to crypto exchanges because of the high volatility of cryptocurrencies, this temptation does not constitute a viable investment rationale."

Institutions and high-net-worth investors still have mixed views on the development trajectory of Bitcoin. Some foresee Bitcoin evolving into a mature store of value and a reliable hedge asset, while others anticipate limitations on BTC's growth in the coming years.

This article is from our partner LONGHASH